Assume that the price of a share of company N trades at $50. You have $5,000 to invest and borrow another $5,000 from your broker so that you invest $10,000 in the stock. The broker charges you an interest rate of 4% on the loan.

a. If you are optimistic about the stock’s prospects, expecting it to go up by 15% during next year, what would be your rate of return?

b. If your broker has a maintenance margin of 25%, how far can the price of the stock fall before he makes you a margin call?

c. What would be your rate of return if you had bought the stock with your own money?

What did the use of margin do to your rate of return?

d. Now assume that your optimistic (bullish) expectations were not met and the stock’s price actually declined by 15%. What would be your rate of return in this case?

e. Finally, what did your use of margin do to your rate of return in this case?