Question

Suppose that Weston (WN) currently is selling at $80 per share. You buy 250 shares, using $15,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.

a. What is your leverage(total investment to equity ratio in your account)?

b What is your return if the stock price immediately changes by 10%?

c If the minimum margin is 30%, how low can WN’s s price fall today before you get a margin call?

d How would your answer to b change if you had financed the initial purchase with only $10000 of your own money? What conclusion can you draw?

e What is the return on your position in a year if the price of the stock increases by 10% next year?

f Continue to assume that one year has passed. How can WN price fall before you get a margin call ?

Answer 1

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