Assume that an investor Short sells 270 shares of a stock for $45 per share on Margin when initial margin requirement was 40%, interest cost of 7% & maintenance margin requirement of 25%. Also, assume that investor had to pay a brokerage commission of 2.5% of initial transaction value at the time of purchase. Assuming that investor has not deposited anything with the broker accept for initial margin but has been paying all taxes, Compute investor’s Actual Margin in Account & Return on investment with 5% capital gains tax & income tax of 2.5% on any dividends that are received, if: A. Price increases to $55/share & company pays a dividend of $5/share B. Price decreases to $20/share, is there a margin call? Is the account restricted? C. Price increases to $75/share & company pays a dividend of $7.5/share. Is there a margin call? If yes, then calculate amount of margin call. D. Also, Calculate investor’s return on investment under both price scenarios (Part A & B) assuming that transaction was on 100% cash. What can you conclude from this?

Q2. At the beginning of year 1, an investor in India invests in 275 shares of Apple (US Co.) at per share price of US$50 & he also invests in 200 bonds of Australian company trading at AS$975 with a coupon rate of 8.75% when exchange rates were A$5.75/JY, Ind Re 4.5/JY & US$8.95/JY with inflation rate of 5%, 6.5%, 7% & 8% in India, Australia, Japan & US, respectively. After a year, Apple pays a dividend of 4.25 US$/Share when the investor sells his shares at a price of $58.25/share. Using these sale receipts & additional 500JY he invests in Japanese company with per share price of JY24.5 when exchange rates were A$6.25/JY, Ind Re 4/JY & US$8/JY with inflation rate of 5.25%, 7.5%, 7.42% & 8.45% in India, Australia, Japan & US, respectively. There was no change in exchange rates & inflation rates for next one year. Investor invests US$10,000 in US T-Bills yielding 7.5% at the beginning of year 3. At the end of year 3, investor sells his investment in Australian company for A$ 995/bond & he also sells his investment in Japanese company for JY30.25/share when exchange rates were A$7.75/JY, Ind Re 2.5/JY & US$8.95/JY with inflation rate of 6%,7.5%, 7.85% & 9.25% in India, Australia, Japan & US, respectively. At the end of 2nd & 3rd year, Japanese company paid a dividend of JY4.85/share. Assuming that investor has to pay capital gains tax of 5% on all his investments & an income tax of 7.5% on all dividends & coupons received & using exact inflation adjusted returns calculate wealth of investor at the beginning of year 3 & use it for calculating end of year 3 wealth.