In: Finance
You purchase 200 shares for $70 a share ($14,000), and after a year the price falls to $65. 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):
25 percent.
40 percent.
75 percent.
Current Stock price = $70
No of shares purchased = 200
Total purchase price = Current Stock price * No of shares purchased
Total purchase price = $70 * 200
Total purchase price = $14,000
End of year Stock price = $65
End of the year value of securities = End of year Stock price * No of shares purchased
End of the year value of securities = $65 * 200
End of the year value of securities = $13,000
Gain / Loss = End of the year value of securities - Total purchase price
Gain / Loss = $13,000 - $14,000
Gain / Loss = - $1000
a) Margin requirement = 25%
Initial margin posted = Margin requirement * Total purchase price
Initial margin posted = 25% * $14,000
Initial margin posted = $3500
Funds borrowed = Total purchase price - Initial margin posted
Funds borrowed = $14,000 - $3,500
Funds borrowed = $10,500
Return on the investment = Gain / Loss / Initial margin posted
Return on the investment = -$1,000 / $3500
Return on the investment = -28.57%
b) Margin requirement = 40%
Initial margin posted = Margin requirement * Total purchase price
Initial margin posted = 40% * $14,000
Initial margin posted = $5600
Funds borrowed = Total purchase price - Initial margin posted
Funds borrowed = $14,000 - $5,600
Funds borrowed = $8,400
Return on the investment = Gain / Loss / Initial margin posted
Return on the investment = -$1,000 / $5,600
Return on the investment = -17.86%
c) Margin requirement = 75%
Initial margin posted = Margin requirement * Total purchase price
Initial margin posted = 75% * $14,000
Initial margin posted = $10,500
Funds borrowed = Total purchase price - Initial margin posted
Funds borrowed = $14,000 - $10,500
Funds borrowed = $3,500
Return on the investment = Gain / Loss / Initial margin posted
Return on the investment = -$1,000 / $10,500
Return on the investment = -9.52%