Question
In January 2019, Mr. Tom McInish won a prize of $ 900,000. Tom decided to sit on his money waiting for a good investment chance.
In January 2019, Mr. Tom McInish won a prize of $ 900,000. Tom decided to sit on his money waiting for a good investment chance. For the last few years, Tom has been educating himself about the stock market. Tom heard a lot of investment professionals talking about making money by investing in new stocks offered to the public at initial public offerings (IPOs). So, Tom is waiting for a good IPO to jump into the market. Tom started to learn about an upcoming IPO of an automobile company that so many people believe will change the future of the industry in the US and globally, that's Green Motors (GRMT). Tom likes this new company so much and is ready to start his investment journey once the stock goes public on Dec 29th , 2019. Tom was not able to purchase the stock at the IPO price of $10. However, he purchased the shares in the secondary market for $15 per share on January 1 st, 2020. His account manager is also very positive about GRMT, so she advised him to use the maximum allowed margin to maximize his returns from this great investment opportunity. Tom's broker's initial margin requirement is 60% and she charges an interest rate of 5%.
Tom borrowed $600,000 from his broker to use entire margin in transaction.
100,000 shares purchased to use entire allowed margin as well.
One year later in Jan 2021, the price of GRMT declined $12 which provided new margin of 50%.
6) based on your calculations Tom would receive a margin call at this point of the year if the GRMT price reaches?
a) $15.93 b) $10.73 c) $12.00 d) $12.55 e) $11.46
7) Now, it is the end of the year 2021, Tom sold all his GRMT shares at $20 per share. What was his rate of return on this investment?
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