Question

Suppose that Xtel currently is selling at $50 per share. You buy 800 shares using $30,000 of your own money, borrowing the remainder of the purchase price from your broker.

The rate on the margin loan is 8%.

a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to

(a) $55; (b) $50; (c) $45? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

a. Percentage gain %

b. Percentage gain %

c. Percentage gain %

b. If the maintenance margin is 25%, how low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) Price $

c. How would your answer to requirement 2 would change if you had financed the initial purchase with only $20,000 of your own money? (Round your answer to 2 decimal places.) Strike price $

d. What is the rate of return on your margined position (assuming again that you invest $30,000 of your own money) if Xtel is selling after one year at

(a) $55; (b) $50; (c) $45? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

a. Rate of return %

b. Rate of return %

c. Rate of return %

e. Continue to assume that a year has passed. How low can Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.) Price $

Answer 1