Question

Assume that you will buy stock on margin (i.e.; stock margin trading).  Assume that Texas Instruments Corp stock is currently selling for $50 per share.  Assume that you will purchase 500 shares on July 29, 2002 at 11:00 AM. You have $15,000 of your own to invest and you will borrow an additional $10,000 from your broker at an interest rate of 10% per year.  Assume that the Maintenance Margin is 40%.

17)  Which of the following presents the balance sheet if the stock price increases to $100 per share July 29, 2002 at 11:01 AM.  In other words, which of the following presents the balance sheet using this information.  

a.                                 ASSETS                                             LIAB & OWN EQUITY        

                    Stock   $50,000                                               Liab     $10,000

                                                                                                        Equity  $40,000

b.                                 ASSETS                                             LIAB & OWN EQUITY        

                    Stock   $25,000                                               Liab     $10,000

                                                                                                        Equity  $15,000

c.                                 ASSETS                                             LIAB & OWN EQUITY        

                    Stock   $50,000                                               Liab     $11,000

                                                                                                        Equity  $39,000

d.                                 ASSETS                                             LIAB & OWN EQUITY        

                    Stock   $50,000                                               Liab    $20,000

                                                                                                        Equity  $ 30,000

e. none of the above

Answer 1

Ans is

1.                                  ASSETS                                             LIAB & OWN EQUITY        

                    Stock   $50,000                                               Liab     $10,000

                                                                                                        Equity  $40,000

Explanation: It is given that 500 shares are purchased at rate of $50 per share on July 29, 2002 at 11:00 AM, so the value of shares (500 x $50) $25000 out of which $15,000 is invested by self and $10,000 is taken on loan, so initial position is Assets = 25000; Liability = 10,000, Own Equity = 15,000.

Subsequently on July 29, 2002 at 11:01 AM, price of shares increases to $100 per share, now the position becomes Assets = 50000; Liability = 10,000, Own Equity = 40,000. the value of shares (500 x $100) $50000 out of which $40,000 is invested money plus profit on change in share price and $10,000 is taken on loan.

Now Option A is right, since it represents the subsequent position after change in share price.

Option b is incorrect, since it represents initial position before price change, Option c is incorrect since it adds interest of 10% on loan amount(10000+10%x 10000), but it becomes due by 1000 only after 1 year.

Option D & E is also incorrect, since liability is only 10000, not 20000.