Inside Traders open a brokerage account and purchases 300 shares of Energy Infus
ID: 2783248 • Letter: I
Question
Inside Traders open a brokerage account and purchases 300 shares of Energy Infusion at $40 per share.They borrow $4,000 from her broker to help pay for the purchase.The interest rate on the loan is 8%.
1. What is the margin on IT’s account when they first purchase the stock?
2. If the share price falls to $30 per share by the end of the year, what is the remaining margin in her account?
3. If the maintenance margin required for the account is 30%, will she receive a margin call?
4. What is the rate of return on her investment?
Explanation / Answer
A) TOTAL PURCHASE PRICE = 40*300 = 12000
MARGIN = (12000-4000)/12000= 66.66%
B) IF SHARE PRICE FALLS TO 30, VALUE OF STOCK PURCHASE = 30*30= 9000
INTEREST COST= 4000*.08= 320
REMAINING MARGIN = 4000 - (12000-9000)-320
= 4000-3000-320= 680
C) X-4000/ X = .3
OR X = 5714 WHERE X IS THE TOTAL VALUE OPF THE PURCHASE AT STOCK PRICE = 5714/300= 19.04$
D) RATE OF RETURN WHEN SHARE FALLS TO 30$
= 8000-(12000-9000)-320
= 8000-3000-320= 4680
roi = 4680/8000 = ,585 OR LOSS OF 1-.585= .415 OR 41.5 %