5. Suppose that Intel currently is selling at $46 per share. You buy 250 shares

Question

5.

Suppose that Intel currently is selling at $46 per share. You buy 250 shares using $8,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%.

  

What is the percentage increase in the net worth of your brokerage account if the price of Intel immediately changes to: (i) $48.76; (ii) $46; (iii) $43.24? What is the relationship between your percentage return and the percentage change in the price of Intel? (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. Omit the "%" sign in your response.)

  

  

If the maintenance margin is 25%, how low can Intel’s price fall before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  

  

How would your answer to (b) change if you had financed the initial purchase with only $5,750 of your own money? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  

  

What is the rate of return on your margined position (assuming again that you invest $8,000 of your own money) if Intel is selling after 1 year at: (i) $48.76; (ii) $46; (iii) $43.24? What is the relationship between your percentage return and the percentage change in the price of Intel? Assume that Intel pays no dividends. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" sign in your response.)

  

  

Continue to assume that a year has passed. How low can Intel’s price fall before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  

6.

Suppose that you sell short 1000 shares of Intel, currently selling for $40 per share, and give your broker $25,000 to establish your margin account.

  

If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Intel stock is selling at: (i) $46; (ii) $40; (iii) $34? Assume that Intel pays no dividends. (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. Omit the "%" sign in your response.)

If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Redo parts (a) and (b), but now assume that Intel also has paid a year-end dividend of $2 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" & "$" signs in your response.)

Margin call will be made at price $ or higher

Suppose that Intel currently is selling at $46 per share. You buy 250 shares using $8,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%.

Explanation / Answer

Answer 5-a. Assets = $46 X 250 Shares = $11,500 Liability = $8,000 Equity = $3,500 (i) Price to $48.76 Equity = Assets - Liabilities = ($48.76 X 250 Shares) - $8,000 = $4,190 Return = $4,190 / $3,500 - 1 = 1.1971 - 1 = 19.71% (ii) Price to $46 Equity = Assets - Liabilities = ($46 X 250 Shares) - $8,000 = $3,500 Return = $3,500 / $3,500 - 1 = 1 - 1 = 0% (iii) Price to $43.24 Equity = Assets - Liabilities = ($43.24 X 250 Shares) - $8,000 = $2,810 Return = $2,810 / $3,500 - 1 = 0.8029 - 1 = -19.71% Answer 5-b. Assets = 250 P Liabilities = Loan Amount = $8,000 Margin Rate = Equity / Assets = (Assets - Liabilities) / Assets = (250 P - $8,000) / 250 P Received a Call, if Margin Rate < 0.25 Therefore, (250 P - $8,000) / 250 P < 0.25 Margin Call if P < $42.67 Answer 5-c. Assets = 250 P Liabilities = Loan Amount = $1,500 Margin Rate = Equity / Assets = (Assets - Liabilities) / Assets = (250 P - $1,500) / 250 P Received a Call, if Margin Rate < 0.25 Therefore, (250 P - $1,500) / 250 P < 0.25 Margin Call if P < $8 Answer 5-d. At the end of Year - Liability = Loan Amount = $8,000 X (1 + 6%) = $8,480 (i) Price to $48.76 Equity = Assets - Liabilities = ($48.76 X 250 Shares) - $8,480 = $3,710 Return = $3,710 / $3,500 - 1 = 1.06 - 1 = 6% (ii) Price to $46 Equity = Assets - Liabilities = ($46 X 250 Shares) - $8,480 = $3,020 Return = $3,020 / $3,500 - 1 = 0.8629 - 1 = -13.71% (iii) Price to $43.24 Equity = Assets - Liabilities = ($43.24 X 250 Shares) - $8,000 = $2,330 Return = $2,330 / $3,500 - 1 = 0.6657 - 1 = -33.43%

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