Question

Suppose that Xtel currently is selling at $79 per share. You buy 500 shares using $30,000 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 Xtel immediately changes to: (i) $87.20; (ii) $79; (iii) $70.80? What is the relationship between your percentage return and the percentage change in the price of Xtel? (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 Xtel’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 $19,750 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 $30,000 of your own money) if Xtel is selling after 1 year at: (i) $87.20; (ii) $79; (iii) $70.80? What is the relationship between your percentage return and the percentage change in the price of Xtel? Assume that Xtel 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 Xtel’s price fall before you get a margin call? (Round your answer to 2 decimal places.)

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Cells PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11AA = = = Dr Wrap Text General Ea Copy Paste BI U D- DA Merge & Center - $ Format Painter % , :.: Formatting as Table Styles Clipboard Font Alignment Number Styles EH577 foc EA EB Formula Bar ED EE E F EG EH 577 578 NO OF SHARES = 500 PURCHASE VALUE OF SHARES = 500 X 79= 580 OWN FUNDS = 582 BORROWED FUNDS = EI EI EK EL EIA 579 39500 581 30000 9500 583 584 585 586 NOW PRICE IS VALUE OF INVESTMENT BORROWED FUNDS NET WORTH % RETURN ON INVESTMENT 87.2 43600 [87.20 X 500] 9500 34100 13.67% [34100/30000 - 1] 79 39500 (79 X 500] 9500 30000 0.00% [30000/30000 - 1] 70.8 35400 (70.80 X 500] 9500 25900 -13.67% [25900/30000 - 1] 587 588 589 590 591 -10.38% (70.8-79)/79 592 593 % IN CREASE IN STOCK PRICE 10.38% 0.00% (87.2-79)/79 (79-79)/79 POSITIVE RELATIONSHIP, JE PRICE RISE, RETURN RISE & VICE VERSA AND HIGHER THE CHANGE IN RETURN COMPARED TO CHANGE IN PRICE 594 595 H Rea STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS HIGH LOW TARGET PRICE ferences price quote EVA MVAJ BO 130% _ 0_ + S E O * 10 ENG 29-09-2019

- 2x Σ AutoSum : A Fill 2 Sort & m Find & Insert Delete Format 2 Clear Filter Editing Select Cells FE EG EH EIE EK EL EG PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11AA = = = Dr Wrap Text General Ea Copy Paste BI U D- DA SF Merge Merge & Center - Center Format Painter $ % % , 4:0 .00 :.: Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles EB603 fx EA ЕВ EC ED 596 597 PRICE = (AMOUNT BORROWED/NO OF SHARES) /(1-MAINTENANCE MARGIN) PRICE = (9500/500)/(1-0.25) = 25.33 OR LOWER 599 600 PRICE = (AMOUNT BORROWED/NO OF SHARES)/(1-MAINTENANCE MARGIN) 601 PRICE = (19750/500)/(1-0.25) = 52.67 OR LOWER 602 603 нь 598 604 605 606 607 608 609 610 611 612 613 614 H Rea STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS HIGH LOW TARGET PRICE ferences price quote EVA MVAJ 00 130% 0 + ELEB * 10 ENG 29-09-2019

- 2x de & center 5 % , Conditional conte stations Insert Delete Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Cells PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11AA = = = Dr Wrap Text General Ea Copy Paste BI U D- DA Format Painter Merge & Center - $ % , :.: Formatting as Table Styles Clipboard Font Alignment Number Styles EB604 - EA EB ECED EF 604 NO OF SHARES = 500 605 PURCHASE VALUE OF SHARES = 500 X 79= 606 OWN FUNDS = 607 BORROWED FUNDS WITH 5% = EE EGEHELE EK ELEVE 39500 30000 9500 608 79 609 610 611 NOW PRICE IS VALUE OF INVESTMENT BORROWED FUNDS WITH INTEREST NET WORTH % INCREASE IN NET WORTH 87.2 43600 [87.20 X 500] 9975 33625 12.08% (33625/30000 - 1] 70.8 35400 (70.80 X 500] 9975 25425 -15.25% [(25425/30000) - 1] 39500 (79 X 500] 9975 29525 -1.58% ((29525/30000 - 1] 612 613 614 615 616 617 618 -10.38% (70.8-79)/79 % IN CREASE IN STOCK PRICE 10.38% 0.00% (87.2-79/79 (79-79)/79 POSITIVE RELATIONSHIP, IE PRICE RISE, RETURN RISE & VICE VERSA AND HIGHER THE CHANGE IN RETURN COMPARED TO CHANGE IN PRICE 619 620 621 622 PRICE = (AMOUNT BORROWED/NO OF SHARES)/(1-MAINTENANCE MARGIN) PRICE = (9975/500)/(1-0.25) = 26.60 OR LOWER STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS H Rea HIGH LOW TARGET PRICE ferences price quote EVA MVAJ BO 130% _ 0_ + ELEB * 0 ENG 29-09-2019