Question

Suppose that XTel currently is selling at $50 per share. You buy 500 shares using $20,000 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) $56; (b) $50; (c) $44? (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.)

b. If the maintenance margin is 20%, how low can XTel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

c. How would your answer to requirement 2 would change if you had financed the initial purchase with only $12,500 of your own money? (Round your answer to 2 decimal places.)

d. What is the rate of return on your margined position (assuming again that you invest $20,000 of your own money) if XTel is selling after one year at (a) $56; (b) $50; (c) $44? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

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.)

Answer 1

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