Question

You purchase 275 shares of 2nd Chance Co. stock on margin at a price of $53. The initial margin requirement is 70 percent.

a. Calculate the initial deposit. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

B. What would be the return if you had purchased the stock a) with margin and b) without margin under the following situations? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

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(i) Assume the stock price is $62 when you sell the stock.   

RATE OF RETURN

with margin ______________

without margin ____________

(ii) Assume the stock price is $46 when you sell the stock.

RATE OF RETURN

with margin ______________

without margin ____________

Answer 1

a]

initial deposit = number of shares * purchase price per share * initial margin %

initial deposit = 275 * $53 * 70%

initial deposit = $10,202.50

b]

(i)

with margin

Addition to margin account = increase in share price * number of shares purchased

Addition to margin account = ($62 - $53) * 275 = $2,475

% return = addition to margin account / initial deposit

% return = $2,475 / $10,202.50 = 24.26%

without margin

Gain = increase in share price * number of shares purchased

Gain = ($62 - $53) * 275 = $2,475

total purchase cost = purchase price per share * number of shares purchased = 275 * $53 = $14,575

% return = Gain / total purchase cost

% return = $2,475 / $14,575 = 16.98%

(ii)

with margin

Deduction from margin account = decrease in share price * number of shares purchased

Deduction from margin account = ($53 - $46) * 275 = $1,925

% return = -(deduction from margin account / initial deposit)

% return = -$1,925 / $10,202.50 = 18.87%

without margin

Loss = decrease in share price * number of shares purchased

Loss = ($53 - $46) * 275 = $1,925

total purchase cost = purchase price per share * number of shares purchased = 275 * $53 = $14,575

% return = -(loss / total purchase cost)

% return = -$1,925 / $14,575 = -13.21%