Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Margin Ratios: Long: Your starting position is as follows: Assets: Liabilities & Equity 1,000 shrs @ $10 Loan from Broker $4,000 = $10,000 Equity $6,000
- Margin Ratios:
- Long:
- Your starting position is as follows:
- Long:
Assets: Liabilities & Equity
1,000 shrs @ $10 Loan from Broker $4,000
= $10,000 Equity $6,000
What is your starting percentage margin?
- You believe the stock is going to go up to $15 per share. If it does that, what would be your:
- Dollar return on the $6,000 equity you started out with?
- The percentage return on the $6,000 equity you started with?
- Bad news you were wrong. The stock drops to $5 per share. Draw up your new balance sheet:
Assets: Liabilities & Equity
1,000 shrs @ Loan from Broker
= Equity:
What is your percentage margin now?
- You receive the dreaded margin call. Your broker says you must return your percentage margin to 50%. Your choices are 1) add more cash, or 2) close out some of your position by selling shares:
- If you do that by adding cash, how much would you need to deposit?
Fill out the resulting balance sheet:
Assets: Liabilities & Equity
1,000 shrs @ 5 Loan from Broker:
= Equity:
- If you do that by closing some of your position, how many shares would you need to sell, (assuming you could sell as many as you wanted @ $5 per share?)
Fill out the resulting balance sheet:
Assets: Liabilities & Equity
shrs @5 Loan from Broker
= Equity:
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started