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Here is the Answer of i , Expert need to do ii, iii . Question 1 (3 points) An investor short sells $32,000 worth of
Here is the Answer of i , Expert need to do ii, iii
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Question 1 (3 points) An investor short sells $32,000 worth of a stock priced at $40 per share using 60% initial margin. The broker charges 4% on the margin loan and requires a 35% maintenance margin. The stock pays a $.40-per-share dividend in 1 year, and then the stock is bought at $37 per share. i. What is the investor's rate of return? ii. What is the price at which the investor gets a margin call? iii. How much does the investor have to deposit with their broker if they get a margin call? Explanation: No of units of stock =32000/40-800 Value of Stock in 1 yr $37*800 = $29,600 Dividends received = $0.4*800 = $320 Margin loan = 40% of $32,000 = $12,800 Interest Due on margin loan = 8% of $12,800 = $1024 Loan Payoff = $12,800 Ending account Balance = $29,600 + $320 - $12,800 - $1024 = 16,096 Return= $19,200 -16096- $3104 Return as % = $3104/$19,200* 100 = 16.16%Step by Step Solution
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