Part E only
(a) What is the holding period return of this buy on margin if the price of Target stock increased by 10% over the next year? 100*$146.69= $14,669 Funds Borrowed=$14669-$8000=$6669 Increased 10%, so 100*161.36= $16136 Gains: $16,136-$14,669= $1,467 $6669*6%= $400.14 Holding Period Return: $400.14/8000*100=5.00% (b) What if Target stock price increased by 1%? 1% increase: $146.69*0.01= $148.16 Total amount: 100*$148.16= $14,816 Gains: $14816-14669= $147 Net Gains: $147-$400.14--$253.14 We suffer a capital loss of $243.14. c) If the maintenance margin requirement is 35%, how far can the price of Target stock fall before you get a margin call? 8000/14669 *100= 54.54% Marginal call price: 146.69* 1-54.54%/1-35%= $102.59 If the price falls below this, margin call will be received. (d) Your friend is also bullish on Target stock and she purchases 100 shares of Target stock at the market price by using $10,000 of her own money and borrow the rest from her broker at an interest rate of 6% per year also. Answer (a), (b) and (c) above for your friend. 100*$146.69= $14669 Borrowed Funds: $14669-10000= $4669 10% increase: $16136 for 100 shares Gains: 16136-14669= $1467 Interest@6%: $4669*10%= $466.90 Net Gains: 1467-466.90=$1000.01 Holding period return: $1000.01/10000*100= 10% 1% increase: $146.69*0.01= $148.16 Total amount: 100*$148.16= $14,816 Gains: $14816-14669= $147 Net Gains: $147-$466.90=-$319.90 Suffer a capital loss of $319.90. $10000/14669 *100=68.17% Marginal Call Price: $146.69* 1-68.17%/(1-35%) = 46.6914/.65= $71.83 If the price falls below this, margin call will be received. e) Compare your answers to all the questions above and relate to the amount of money borrowed in your and your friend's investment