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Problem #1 (Selling on Margin): General Motors (Ticker: GM) sold for approximately $40.00 a share on October 1, 2020 and suppose Shady Sam and Ethical
Problem #1 (Selling on Margin): General Motors (Ticker: GM) sold for approximately $40.00 a share on October 1, 2020 and suppose Shady Sam and Ethical Edna purchased 100 shares. One year later, on October 1, 2021, GM stock is worth about $50.00 per share. Within the context of this problem, calculate the following: 1. Both investors do not have the capital to purchase 100 shares of stock. What does it mean to "buy a stock on margin" (define the term in your own words)? 2. What is the capital gain (or loss) on General Motors if an investor bought shares for the price specified in the problem above? 3. Suppose Shady Sam bought GM on margin and the margin requirement at Fidelity was 25%. a. What is the margin (in US dollars)? b. What is the return on Shady Sam's purchase of GM stock on margin? 4. Suppose Ethical Edna purchased 100 shares of GM stock on margin and the margin requirement at Schwab was 75%. a. What is the margin (in US dollars)? b. What is the return on Ethical Edna's purchase of GM stock on margin? 5. Which investor's return was higher? Why
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