Question

Marlene Bellamy purchased 500 shares of Writeline Communications stock at $55.02 per share using the prevailing minimum initial margin requirement of 58%.

She held the stock for exactly 44 months and sold it without any brokerage costs at the end of that period. During the 44​-month holding​ period, the stock paid $1.63 per share in cash dividends. Marlene was charge 7.5% annual interest on the margin loan. The minimum maintenance margin was 25 %

a. Calculate the initial value of the​ transaction, the debit balance​, and the equity position on​ Marlene's transaction.

b. For each of the following share​ prices, calculate the actual margin​ percentage, and indicate whether​ Marlene's margin account would have excess​ equity, would be​ restricted, or would be subject to a margin​ call:

​

(1) $ 44.75

​(2) $ 71.17

(3) $ 34.32

c. Calculate the dollar amount of​ (1) dividends received and​ (2) interest paid on the margin loan during the 44​-month holding period.

d. Use each of the following sale prices at the end of the 44​-month holding period to calculate​ Marlene's annualized rate of return on the Writeline Communications stock​ transaction:

​(1) $ 50.39

​(2) $ 60.75

(3) $ 70.19

Answer 1

4. А 2 3 | Initial share price Number of shares Inital margin value of transaction Amount invested equity) Amount borrowed (debit) 4 a) 55.02 per share 500 58% 27,510 =500*55.02 15955.8 =58%*500*55.02 11554.2 -42%*500*55.02 8 b) 11 new shar price*no.of shares-amount borrowed+dividend received-loan interest paid New Share price Your investment became New margin 44.75 8458.40 37.80% restricted 71.17 21668.40 60.89% excess equity 34.32 3243.40 18.90% subject to margin call new investment level/(new share price*no. of shares) you took loan of 11554.2 Interest paid on loan = 11554.2* 7.5%*(44/12) = 3177.41 17 18 Dividend Total Dividend received 1.63 per share 815 -1.63*500 d) Interest paid Dividend 3177.41 Sale price Total final investment Return (44-month period) Annulized return 815 50.39 25195.00 -29.31% -9.03% 60.75 30375.00 3.15% 0.85% 70.19 35095.00 32.73% 8.03% Total return = (Final investment - Initial investment + Dividend - Interest paid)/ Initial investment Annulized return = (1+Holding period return)^(1/time in years) = (1+HPR)^(1/(44/12))