Question

Suppose that LMN stock currently is selling at $78 per share. You buy 250 shares using $10,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%.

a. What is the percentage increase in the net worth of your brokerage account if the price of LMN immediately changes to: (i) $84.24; (ii) $78; (iii) $71.76? What is the relationship between your percentage return and the percentage change in the price of LMN? (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 25%, how low can LMN's price fall before you get a margin call? (Round your answer to 2 decimal places.)

c. How would your answer to (b) change if you had financed the initial purchase with only $9,750 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 $10,000 of your own money) if LMN is selling after 1 year at: (i) $84.24; (ii) $78; (iii) $71.76? What is the relationship between your percentage return and the percentage change in the price of LMN? Assume that LMN pays no dividends. (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 LMN's price fall before you get a margin call? (Round your answer to 2 decimal places.)

Answer 1

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