Suppose that Intel currently is selling at $46 per share. You buy 250 shares usi
ID: 2796855 • Letter: S
Question
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?
Please help this is the second time posting the same question, before nobody fixed and nobody answered and they did wrong.
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%.
a.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) $43.24? What is the relationship between your percentage return and the percentage change in the price of Intel? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" sign in your response.)
(i) Percentage gain % (ii) Percentage gain % (iii) Percentage gain % b.If the maintenance margin is 25%, how low can Intel’s price fall before you get a margin call? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Margin call will be made at price $ or lower c.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.)
Margin call will be made at price $ or lower d.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.)
(i) Rate of return % (ii) Rate of return % (iii) Rate of return % e.Continue to assume that a year has passed. How low can Intel’s price fall before you get a margin call?
Please help this is the second time posting the same question, before nobody fixed and nobody answered and they did wrong.
Explanation / Answer
a)
Total holdings(Assets) = 250 shares * 46
= 11500
Liability(by getting loan) = 3500
your equity = 11500 - 3500 = 8000(own money)
i)
scenario 1:
if price = 48.76
Equity = (48.76 * 250) - 3500
= 8690
Return = (equity / initial equity) - 1 = (8690/8000) - 1 = 8.625%
ii)
Scenario 2:
price = 46
Equity = (46*250) - 3500 = 8000
return = (equity / initial equity) - 1 = (8000/8000) - 1 = 0%
iii)
Scenario 3:
price = 43.24
Equity = (43.24 * 250) - 3500
= 7310
return = (equity / initial equity) - 1 = (7310/8000) - 1 = - 8.625%
Retionship between margin and total stock return(Intel)
Margin return = stock return * (assets/equity)
(assets/equity) = leverage ratio
so due to this term the margin return is more than the stock return
b)
here we need to find out the price at which we get the margin call
maintenance margin = 25%
Total assets = 250 * P
P = price of stock
Margin loan amount = liability = 3500
Margin rate = equity / Assets
= (Assets - liabilities)/ Assets = (250P - 3500) / 250P
if margin rate is less than 25% it will trigger a call
(250P - 3500) / 250P < 0.25
solve for P
P < 18.66
Hence when P becomes less than 18.66 it will trigger a call
c)
when own money = 5750
then the liability becomes = 5750
since total = 11500
Assets = 250P
Margin rate = Equity / assets
(Assets - liabilities)/ Assets = (250P - 5750) / 250P
Margin Call( at 25%)
(250P - 5750) / 250P < 0.25
Solve for P
we get
P < 30.66
when price becomes below 30.66
it will trigger a call.