Claire Gerber wants to buy 900 shares of Google, which is selling in the market
ID: 2814748 • Letter: C
Question
Claire Gerber wants to buy 900 shares of Google, which is selling in the market for $534.09 a share. Rather than liquidate all her savings, she decides to borrow through her broker at 5 percent a year. Assume that the margin requirement on common stock is 50 percent. If the stock rises to $625 a share over the next year, calculate the dollar profit and percentage return that Claire would earn if she makes the investment with 50 percent margin. Contrast these figures to what she'd make if she uses no margin.
Calculate the dollar net profit. Round the answers to the nearest dollar.
Calculate the return on investment. Round the answers to two decimal places.
Without Margin With 50% Margin $ $Explanation / Answer
1. Computation of Dollar Net Profit and ROI without Margin
Amount required to buy shares = No. of shares * Shares Price = 900 * $534.09
Amount required to buy shares = $480681
Amount received on Selling of Stock = No. of shares * Shares Price = 900 * $625
Amount received on Selling of Stock = $562500
Dollar Net Profit = Amount received on selling - Amount required to buy stock
Dollar Net Profit = $562500 - $480681
Dollar Net Profit = $81819
Return on Investment = Dollar Net Profit / Amount invested
Return on Investment = 81819 / 480681
Return on Investment = 17.02%
2. Computation of Dollar Net Profit and ROI with 50% Margin
Amount required to buy shares = No. of shares * Shares Price = 900 * $534.09
Amount required to buy shares = $480681
Margin from Broker = $480681 * 50% = $240340.50
Amount paid to broker = $240340.50 * 1.05 = $252357.53
Amount received on Selling of Stock = No. of shares * Shares Price - Broker Payment
Amount received on Selling of Stock = 900 * $625 - $252357.53
Amount received on Selling of Stock = $310142.48
Dollar Net Profit = Amount received on selling - Amount Invested
Dollar Net Profit = $310142.48 - $240340.5
Dollar Net Profit = $69802
Return on Investment = Dollar Net Profit / Amount invested
Return on Investment = 69802 / 240340.50
Return on Investment = 29.04%