Question

In: Finance

You purchase 50 shares for $50 a share ($2,500), and after a year the price falls...

You purchase 50 shares for $50 a share ($2,500), and after a year the price falls to $40. Calculate the percentage return on your investment if you bought the stock on margin and the margin requirement was (ignore commissions, dividends, and interest expense):

  1. 25 percent. Use a minus sign to enter the amount as a negative value. Round your answer to one decimal place.

      %

  2. 65 percent. Use a minus sign to enter the amount as a negative value. Round your answer to one decimal place.

      %

  3. 80 percent. Use a minus sign to enter the amount as a negative value. Round your answer to one decimal place.

      %

Solutions

Expert Solution

Original Purchase price per share was $ 50.

Number of shares purchased = 50.

Total Amount invested = 50*50 - 2500

Current Value per share = 40

Total Loss = (Current Value - Original Value) * Number of shares

= (40 - 50) * 50 = 500

The loss of 500 will be funded from margin requirements.

Case A- 25 %

Total amount invested = Amount of share purchased * Margin Required

= 2500*25% = 625

Loss = 500

Current value = 625-500 = 125

Percentage loss = 500/625*100 = 80%

So in case A, The loss is 80%.

-80%

Case B- 65 %

Total amount invested = Amount of share purchased * Margin Required

= 2500*65% = 1625

Loss = 500

Current value = 1625-500 = 1125

Percentage loss = 500/1625*100 = 30.769%

So in case B, The loss is 30.769%.

-30.769% or -30.7%

Case C- 80 %

Total amount invested = Amount of share purchased * Margin Required

= 2500*80% = 2000

Loss = 500

Current value = 2000-500 = 1500

Percentage loss = 500/2000*100 = 25%

So in case C, The loss is 25%

-25%.


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