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Problem 2: Buying on Margin [20 points] An investor decides to purchase shares of DWNR on margin. The investor has $175,000 cash in their account
Problem 2: Buying on Margin [20 points] An investor decides to purchase shares of DWNR on margin. The investor has $175,000 cash in their account to use for the purchase (assume this is the only position in the account). The investor may borrow from their broker at 7% per year and must have an initial margin of at least 50%. The maintenance margin is 30%. The current market price of DWNR is $40.00 and DWR pays quarterly dividends of S0.75 per share (assume the first dividend comes exactly 3 months from today). [4] Assume the investor utilizes their maximum margin potential. How many shares of DWNR can the investor purchase? [4] Below what stock price will the investor receive a margin call? [4] If the investor holds this position for 3 months and then sells the shares and repays the loan, what is the percentage profit (loss) if the market price of DWNR is $47.00 after3 months? [4] If the investor holds this position for 3 months and then sells the shares and repays the loan, what is the percentage profit (loss) if the market price of DWNR is S33.00 after 3 months? [4] Compare your answers in C. and D. to the profit (loss) if the investor did not use the margin account and instead only purchased $175,000 worth of DWNR shares. effect of leverage on returns. a. b. c. d. e. Discuss the
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