Question

In: Finance

1) Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest...

1) Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest rate on margin loan will be 8% annually. Kenanga securities has set margin requirement of 70% and investor has to maintain the margin above 50% or otherwise there might be a margin call. Currently the market price of stock for WMF is RM3.50 and Mrs Hanim decided to buy 20 lots of them. The company had given out dividend RM0.50 per share a year before stock issuance. The commission fees, stamp duty and clearing fees totaled to 1.5% of the transaction value.

What is the rate of return if she bought the shares on cash basis and decided to sell a year later at the price of RM8.00 per share.

Solutions

Expert Solution

Purchase price of stock = RM3.50

Purchase Value = 3.50 x 20 = RM70

Margin Availed (1- 70% of value)  = 70 x 30% = RM21

i) Interest to be paid on margin availed = 21 x 8% = RM1.68

The investor has to pay the transaction charges at 1.5% of the value of purchase.

Actual purchase price for investor = Purchase Price + Transaction charges

= 3.50 + 1.5% x 3.50

= 3.5525

ii) The net purchase value for 20 lots = 20 x 3.5525 = RM71.05

The share of WMF was sold at RM8. The transaction charges need to be paid here as well

iii) The effective selling value of share for investor

= (8- 8 x 1.5%) x 20

= 7.88 x 20

= RM 157.60

The net return for investor = (Gains on the share after adding transaction charges - Interest paid on margin) / Purchase Value after adding transaction charge

= (157.60 - 71.05 - 1.68) / 71.05

= 84.07/ 71.05

= 119.45%

**If the dividend is also paid (the question only refers to last years dividend) in the current year at RM0.50 ,the investor would receive all of dividend, irrespective of margin.

The return for investor, if the dividend is also paid

= (Gains on the share after adding transaction charges - Interest paid on margin + Dividend earning) / Purchase Value after adding transaction charge

= (157.60 - 71.05 - 1.68 + (0.50 x20)) / 71.05

= 94.07/ 71.05

= 133.53%


Related Solutions

2) Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest...
2) Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest rate on margin loan will be 8% annually. Kenanga securities has set margin requirement of 70% and investor has to maintain the margin above 50% or otherwise there might be a margin call. Currently the market price of stock for WMF is RM3.50 and Mrs Hanim decided to buy 20 lots of them. The company had given out dividend RM0.50 per share a year...
5)Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest rate...
5)Mrs Hanim wants to use the margin trading services offered by Kenanga Securities. The interest rate on margin loan will be 8% annually. Kenanga securities has set margin requirement of 70% and investor has to maintain the margin above 50% or otherwise there might be a margin call. Currently the market price of stock for WMF is RM3.50 and Mrs Hanim decided to buy 20 lots of them. The company had given out dividend RM0.50 per share a year before...
Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs....
Firm B wants to hire Mrs. X to manage its advertising department. The firm offered Mrs. X a 3-year employment contract under which it will pay her an $67,500 annual salary in years 0, 1, and 2. Mrs. X projects that her salary will be taxed at a 25 percent rate in year 0 and a 40 percent rate in years 1 and 2. Firm B’s tax rate for the 3-year period is 35 percent. Use Appendix A and Appendix...
Kenix Brokerage House (KBH) provides brokerage services, including margin trading. Initial margin requirement is set at...
Kenix Brokerage House (KBH) provides brokerage services, including margin trading. Initial margin requirement is set at 50% with maintenance margin of 30%. Margret plans to short 1,000 shares of Tasty Meat at $50 per share. a) Without considering interest cost of borrowing stock, how high the Tasty Meat price is when Margret gets a margin call? (rounded your answer to 4 decimal places) How much cash should she deposit in order to maintain the percentage margin back to 40%? b)...
3. Counting Services Inc. has the following portfolio of trading equity securities at 12/31/18. All securities...
3. Counting Services Inc. has the following portfolio of trading equity securities at 12/31/18. All securities were purchased during 2018. Symbol # shares Total Cost Market Value AAPL 1000 $105,000 $125 BMX 2000 $47,000 $51 CAT 1000 $100,000 $105 GNC 3000 $64,000 $21 Total   $316,000 Prepare the adjustment necessary at 12/31/18. On February 12, 2019, Counting Services sells 1,000 shares of AAPL for $125,000. Prepare the journal entry. The total cost of the three remaining securities is $211,000 and the...
Counting Services Inc. has the following portfolio of trading equity securities at 12/31/17. All securities were...
Counting Services Inc. has the following portfolio of trading equity securities at 12/31/17. All securities were purchased during 2017. Symbol # shares Total Cost Market Value AAPL 1000 $102,000 $107,000 BMX 2000 $47,000 $41,000 GNC 3000 $64,000 $87,000 Total $213,000 • Prepare the adjustment necessary at 12/31/17. • On February 12, 2018, Counting Services sells 1,000 shares of AAPL for $115,000. Prepare the journal entry. • The total cost of the two remaining securities is $111,000 and the market value...
Question 2 (15 marks) Kenix Brokerage House (KBH) provides brokerage services, including margin trading. Initial margin...
Question 2 Kenix Brokerage House (KBH) provides brokerage services, including margin trading. Initial margin requirement is set at 50% with maintenance margin of 30%. Margret plans to short 1,000 shares of Tasty Meat at $50 per share. a) Without considering interest cost of borrowing stock, how high the Tasty Meat price is when Margret gets a margin call? (rounded your answer to 4 decimal places) How much cash should she deposit in order to maintain the percentage margin back to...
QUESTION 1 CC Car Wash specializes in car cleaning services. The services offered by the company,...
QUESTION 1 CC Car Wash specializes in car cleaning services. The services offered by the company, the exact service time, and the resources needed for each of them are described in the table following: Service Description Processing Time Resource A. Wash Exterior car washing and drying 10 minutes 1 automated washing machine B. Wax Exterior car waxing 15 minutes 1 automated waxing machine C. Wheel Cleaning Detailed cleaning of all wheels 16 minutes 1 employee D. Interior Cleaning Detailed cleaning...
QUESTION 1 CC Car Wash specializes in car cleaning services. The services offered by the company,...
QUESTION 1 CC Car Wash specializes in car cleaning services. The services offered by the company, the exact service time, and the resources needed for each of them are described in the table following: Service Description Processing Time Resource A. Wash Exterior car washing and drying 10 minutes 1 automated washing machine B. Wax Exterior car waxing 15 minutes 1 automated waxing machine C. Wheel Cleaning Detailed cleaning of all wheels 16 minutes 1 employee D. Interior Cleaning Detailed cleaning...
1. Trading securities are at reported on the balance sheet at amortized cost. True or False?...
1. Trading securities are at reported on the balance sheet at amortized cost. True or False? Answer ______ 2. Warranty expense estimates are higher than warranty returns in a given year. This will result in a deferred tax asset. True or False? Answer ______ 3. An increase in bonds payable is reported in the financing section of the indirect method statement of cash flows. True or False? Answer ______ 4. A change in accounting estimate should be accounted for in...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT