P2.23 You have just learned about the mechanics of margin trading and want to take advantage of the potential benefits of financial leverage. You have decided to open a margin account with your broker and to secure a margin loan. The specifics of the account are as follows: Initial margin requirement is 70%. Maintenance margin is 30%. You are informed that if the value of your account falls below the maintenance margin, your account will be subject to a margin call. You have been following the price movements of a stock over the past year and believe that it is currently undervalued and that the price will rise in the near future. You feel that the opening of a margin account is a good investment strategy. You have decided to purchase three round lots (i.c., 100 shares per round lot) of the stock at its current price of $25 per share. Create a spreadsheet similar to the spreadsheet for Table 2.3, which can be viewed at www. myfinancelab.com, to model and analyze the following market transactions. Questions

a. Calculate the value of the investment in the stock as if you did not make use of margin trading. In other words, what is the value of the investment if it is funded by 100% cash equity?

b. Calculate the debit balance and the cash equity in the investment at the time of opening a margin account, adhering to the initial margin requirement.

c. If you use margin and the price of the stock rises by $15 to $40/share, calculate the capital gain earned and the return on investor's equity.

d. What is the current margin percentage based on question b?

e. If you use margin and the price of the stock falls by $15 to $10/share, calculate the capital loss and the respective return on investor's equity.

f. What is the new margin percentage based on question

e, and what is the implication for you, the investor