Question
Gordon Gekko purchased 21m shares of BlueStar (BST) through share & option transactions facilitated by Jackson & Steinham at an average price of $24.25 per
Gordon Gekko purchased 21m shares of BlueStar (BST) through share & option transactions facilitated by Jackson & Steinham at an average price of $24.25 per share.
His broker Bud Fox hangs him out in the wind to twist by selling BST to Sir Larry Wildman for only $16.40 a share!
If Gekko & Co. paid only 45% of the initial purchase price in cash, and borrowed the rest on margin(ignoring 2% principal leverage fees & 0.25% trading fees otherwise paid to Jackson & Steinham), what % of Gekkos initial capital has been wiped out?
How much lower is his holding period return (HPR) using leverage, versus paying for BST in cash?
| A. | Capital wiped out: 71.02%; HPR -39.56% |
| B. | Capital wiped out: 71.02%; HPR -31.96% |
| C. | Capital wiped out: 75.69%; HPR -39.06% |
| D. | Capital wiped out: 71.94%; HPR -39.56% |
| E. | Capital wiped out: 75.69%; HPR -31.96% |
| F. | Capital wiped out: 71.94%; HPR -39.06% |
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Corporate Finance
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Roberts, Hamdi Driss
8th Canadian Edition
01259270114, 9781259270116
