You believe that Baobab Ltd shares are the most undervalued. The shares are currently trading at...

You believe that Baobab Ltd shares are the most undervalued. The shares are currently
trading at $20 per share and you decide to buy as many shares as possible by placing
$10 000 into a margin account. The initial margin requirement is 50%.

A. What is the maximum number of shares you will be allowed to purchase?

B. Assuming you take the position in part A. above. What will be the return on your
investment if the stock price changes to $29 per share?

C. Calculate the return on your investment assuming you purchase the same
number of shares as in part A, but initially place $15 000 in your margin account.

D. What is the new percentage margin given the $15 000 margin requirement from
part C?

Expert Solution

A

Shares bought = 10,000/ (20*50%) = 1000

B

Return on investment:

Particulars	Amount
Investment	20,000
× appreciation	45%
Increase in value	9,000
Less: interest on loan	-
Net return	9,000
/ own investment	10,000
Return on investment	90.00%

C

Particulars	Amount
Investment	20,000
× appreciation	45%
Increase in value	9,000
Less: interest on loan	-
Net return	9,000
/ own investment	15,000
Return on investment	60.00%

D

Margin = 15000/20000= 75%

jeff jeffy answered 2 years ago

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