Question

You purchase 1,000 shares MSFT stock on margin at a price of $150/share. The margin rate is 5% continuously compounded. The margin loan is $50,000. You want to analyze your potential returns under three scenarios for MSFT’s stock price over the next year:

i) $120/share

ii) $150/share

iii) $180/share

Fill in the table below to show your work.

	Current Value	MSFT Stock Price 1-year Later
		$120/share	$150/share	$180/share
Asset
Margin Loan
Equity
% Return

Answer 1

Ans:

Loan Amount : $50,000

Rate : 5%

Payment after 1 year : $50,000 * ert

= $50,000 * e^5%*1 = $50,000 * 1.0512711 = $52,564

Interest Expense : $52,564 - $50,000 = $2,564

1.

Rate of stock after : 1 Year : $120

Potential Return : 1,000 *($120 - $150) - $2,564 = ($32,564)

Rate of return : ($32,564) / $50,000 = (65.13%)

2.

Rate of stock after : 1 Year : $150

Potential Return : 1,000 *($150 - $150) - $2,564 = ($2,564)

Rate of return : ($2,564) / $50,000 = (5.13%)

3.

Rate of stock after : 1 Year : $180

Potential Return : 1,000 *($180 - $150) - $2,564 = $27,436

Rate of return : $27,436 / $50,000 = 54.87%

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