Question

In: Finance

Casey is considering buying stock on margin. She wants to buy $85,000 in stock; she will...

Casey is considering buying stock on margin. She wants to buy $85,000 in stock; she will put 30% down and borrow the remaining $59,500 at 10% interest. (a) if Casey’s investment goes up by 45 percent after one year, and she pays off her loan, how much will she make in dollars? What percent rate of return does this represent? (b) If Casey’s investment instead drops by 18 percent, how much will she lose in dollars? In terms of a percentage loss how much will she lose?

Solutions

Expert Solution

a]

Initial investment = value of stock purchased * margin %

Initial investment = $85,000 * 30%

Initial investment = $25,500

Ending value of stock = value of stock purchased * (1 + increase %)

Ending value of stock = $85,000 * (1 + 45%)

Ending value of stock = $123,250

Interest on loan = amount borrowed * interest rate

Interest on loan = $59,500 * 10% = $5,950

Amount earned in $ = Ending value of stock - value of stock purchased - Interest on loan

Amount earned in $ = $123,250 - $85,000 - $5,950

Amount earned in $ = $32,300

% rate of return = Amount earned in $ / Initial investment

% rate of return = $32,300 / $25,500

% rate of return = 126.67%

b]

Initial investment = value of stock purchased * margin %

Initial investment = $85,000 * 30%

Initial investment = $25,500

Ending value of stock = value of stock purchased * (1 - decrease %)

Ending value of stock = $85,000 * (1 - 18%)

Ending value of stock = $69,700

Interest on loan = amount borrowed * interest rate

Interest on loan = $59,500 * 10% = $5,950

Amount lost in $ = Ending value of stock - value of stock purchased - Interest on loan

Amount lost in $ = $69,700 - $85,000 - $5,950

Amount lost in $ = -$21,250

% rate of return = Amount lost in $ / Initial investment

% rate of return = -$21,250 / $25,500

% rate of return = -83.33%


Related Solutions

Emily DiDonato is considering buying stock on margin. She wants to buy $85,000 in stock; she...
Emily DiDonato is considering buying stock on margin. She wants to buy $85,000 in stock; she will put 30% down and borrow the remaining $59,500 at 10% interest. (a) if Emily’s investment goes up by 45 percent after one year, and she pays off her loan, how much will she make in dollars? What percent rate of return does this represent? (b) If Emily’s investment instead drops by 18 percent, how much will she lose in dollars? In terms of...
Miss Good wants to buy BAD stock, which is selling for $5 per share. She can buy on margin.
Miss Good wants to buy BAD stock, which is selling for $5 per share. She can buy on margin. The initial margin requirement is 40%, and the maintenance margin is 30%.(a) Miss Good has $2,000 in hand. If she decides NOT to buy on margin; that is, she wants to buy using only her own funds. Then what is the total shares she can buy? If the price increases to $6 per share, what’s the rate of return? If the...
Megan is considering the purchase of a new car. She wants to buy the new Audi...
Megan is considering the purchase of a new car. She wants to buy the new Audi A1, which will cost her R347 500. She will finance 90% of the purchase price at an interest rate of 8% per annum, with monthly payments over three years. Interest is compounded monthly. How much money will she still owe on the loan at the end of one year
(i) An investor is considering buying XYZ Corp. stock on margin. His stockbroker informed him that...
(i) An investor is considering buying XYZ Corp. stock on margin. His stockbroker informed him that 100 shares of XYZ Corp. cost $42 a share. The margin requirement was 60 percent with an interest rate of 4.5 percent on borrowed funds, and commissions on the purchase and sale were 4%. One year after the investor invested in stock XYZ corp. paid an annual dividend of $1.55 a share. The price of the stock also rose to $70 in one year....
You are considering buying a new car. The sticker price is $85,000 and you have $25,000...
You are considering buying a new car. The sticker price is $85,000 and you have $25,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 6.5 percent and you wish to pay for the car over a 5 year period, what are your monthly car payments? DO NOT USE EXCEL
Assume that you will buy stock on margin (i.e.; stock margin trading).  Assume that Texas Instruments Corp...
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...
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it.
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it. Three stores carry the same dress, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $103 for the dress:StoreTravel Time Each WayPrice of a Dress(Minutes)(Dollars per dress)Local Department Store15103Across Town3089Neighboring City6063Juanita makes $16 an...
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it
Juanita is deciding whether to buy a dress that she wants, as well as where to buy it. Three stores carry the same dress, but it is more convenient for Juanita to get to some stores than others. For example, she can go to her local store, located 15 minutes away from where she works, and pay a marked-up price of $129 for the dress:StoreTravel Time Each Way (Minutes)Price of a Dress (Dollars per dress)Local Department Store15129Across Town3086Neighboring City6063Juanita makes \(\$...
Ann wants to buy a building. The annual NOI will be $100,000 She wants a 30...
Ann wants to buy a building. The annual NOI will be $100,000 She wants a 30 year fully amortizing fixed rate mortgage at an annual rate of 5% with compounding monthly payments. The lender has a minimum DSCR of 1.2. If Ann gets a 50% LTV loan for $500,000 what is her DCSR?
Describe buying on margin.
Describe buying on margin.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT