1. Jon Snow is a stockbroker who lives with his wife, Daenerys Targaryen, and their three dragons in Westeros. Jon firmly believes that the only way to make money in the market is to follow an aggressive investment i.e. to use margin trading. In fact, Jon has built a margin account over time. He currently holds $75,000 worth of stock in his margin account, though the debit balance in the account amounts to only $30,000. Recently Jon uncovered a stock that, on the basis of extensive analysis, he feels is about to take off. The stock, Night King Essentials (NKE), currently trades at $20 per share. Jon feels it should soar to at least $50 within a year. NKE pays no dividends, the prevailing initial margin requirement is 50%, and margin loans are now carrying an annual interest charge of 10%. Because Jon feels sostrongly about NKE, he wants to dosome pyramiding by using his marginaccount to purchase 1,000 shares of the stock. (a) Discuss the concept of pyramiding here. (b) Jon's account is in what present margin position? (c) Jon buys the 1,000 shares of NKE through his margin account. i. What will the margin position of the account be after the NKE transaction if Jon follows the prevailing initial margin (50%) and uses $ 10,000 of his money to buy the stock? ii. What ifhe uses only $2,500 equity and obtains a margin loan for the balance ($17,500)? iii. How do you explain the fact that the stock can be purchased with only 12.5% margin when the prevailing initial margin requirement is 50%? (d) Assume that Jon buys 1,000 shares of NKE stock at $20 per share with a minimum cash investment of $2,500 and that the stock does take off and its price rises to $40 per share in one year. i. What is the return on invested capital for this transaction? ii. What return would Jon have earned if he had bought the stock without margin-that is, if he had used all his own money? (e) What do you think of Jon's idea to pyramid? What are the risks and rewards of this strategy