You purchased 100 shares of Express Scripts common stock on margin at $70.38 per share. Assume...

You purchased 100 shares of Express Scripts common stock on margin at $70.38 per share. Assume the initial margin is 50% and the maintenance margin is 30%. One year later, the stock price closes at $71.75. If the broker’s call loan rate is 2.00%, what is your return on equity?

Can I please get a step by step breakdown so that I can better understand the process involved? Thank you.

Solutions

Expert Solution

Number of share = 100

Price per share = $70.38

Total value of investment = $70.38 × 100

= $7,038

Initial margin = 50%

Percent of investment borrowed = 50%

Total value of own fund invested = $7,038 × 50%

= $3,519

Loan = $3,519

Interest rate on loan = 2%

Value of loan plus interest in one year = $3,519 × (1 + 2%)

= $3,589.38.

Total amount need to pay after one year is $3,589.38.

Stock price goes up $71.75.

Value of investment after one year = $71.75 × 100

= $7,175.

Value of equity after repayment of debt = $7,175 - $3,589.38

= $$3,585.62.

Return on equity = ($3,582.62 - $3,519) / $3,519

= $66,62 / $3,519

= 1.89%

Return on equity is 1.89%.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You purchased 100 shares of IBM common stock on margin at $151 per share. Assume the...

You purchased 100 shares of IBM common stock on margin at $151 per share. Assume the initial margin is 50%, and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. Round your answer to the nearest cent (2 decimal places).

You purchased 100 shares of common stock on margin for $150 per share. The initial margin...

You purchased 100 shares of common stock on margin for $150 per share. The initial margin requirement is 65%, the maintenance margin requirement is 40%. Find your rate of return in % if you sell the stock at $180 per share exactly 1 year later if interest rate on margin loan is 10%

Assume you sold short 100 shares of common stock at $70 per share. The initial margin...

Assume you sold short 100 shares of common stock at $70 per share. The initial margin is 30%. What would be the maintenance margin if a margin call is made at a stock price of $85? A) 40.5% B) 20.5% C) 35.5% D) 23.5% E) none of the above 53. You sold short 100 shares of common stock at $45 per share. The initial margin is 30%. At what stock price would you receive...

You purchased 250 shares of common stock on margin for $45 per share. The initial margin...

You purchased 250 shares of common stock on margin for $45 per share. The initial margin is 60%, and the stock pays no dividend. Your rate of return would be ________ if you sell the stock at $48 per share. Ignore interest on margin. 0.132 0.238 0.111 0.208

You purchased 1000 shares of Dell stock on margin at $70 per share. Assume the initial...

You purchased 1000 shares of Dell stock on margin at $70 per share. Assume the initial margin is 50% and the maintenance margin is 40%. Assume the stock pays no dividends, and ignore interest on the margin loan. a.What is the rate of return on his investment if the price rises to $85 per share? b.What is the margin if Stock price falls to $60 per share, will the investor receive a margin call ? c.How far can the stock...

1) Assume you buy 100 shares of stock at $40 per share on margin. The initial...

1) Assume you buy 100 shares of stock at $40 per share on margin. The initial margin is 50%. If the price rises to $55 per share, what is your percentage gain on the initial equity?

An investor purchased 200 shares of stock at $100 per share on 65% margin. Suppose the...

An investor purchased 200 shares of stock at $100 per share on 65% margin. Suppose the maintance margin is 40% at what price does the investor get a margin call? Regarding the previous question, if the price declines to $70 per share whats the return to the investors equity? What if the stock price rises to $150 per share? ignore interest and transaction costs.

1. Assume you sold short 100 shares of common stock at $50 per share. The initial...

1. Assume you sold short 100 shares of common stock at $50 per share. The initial margin is 60%. What would be the maintenance margin if a margin call is made at a stock price of $60? 2. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period, and you...

1.) Assume you purchased 100 shares of Zoomer Corp's stock on margin at the beginning of...

1.) Assume you purchased 100 shares of Zoomer Corp's stock on margin at the beginning of the year for $40 per share. You use $2500 of your own funds and borrow $1500 from the broker. Maintenance Margin requirement is 25%. a) At what price would you receive a margin call (ignore interest)? b) Annual interest cost is 4% on the margin account loan. What is your rate of return on your investment if Zoomer's stock is $44.50 per share after...

Assume you sell short 100 shares of Shell Corp. at $100 per share, with initial margin...

Assume you sell short 100 shares of Shell Corp. at $100 per share, with initial margin at 45%. The minimum margin requirement is 30%. The stock will pay no dividends during the period, and you will not remove any money from the account before making the offsetting transaction. At what price would you face a margin call? If the price is $110 at the end of the period, what is your margin ratio at that point?

Subjects