Question
Suppose an investor initially pays $6000 toward the purchase of $10,000 worth of stock (100 shares at $100 per share), borrowing the remaining $4,000 from
Suppose an investor initially pays $6000 toward the purchase of $10,000 worth of stock (100 shares at $100 per share), borrowing the remaining $4,000 from a broker. A. Construct the initial balance sheet B. What is the initial percentage margin? C. Assuming the price declines to $70, construct the new balance sheet and find the new percentage margin D. Assuming the maintenance margin is 30%, to what price should the stock drop before the investor receives a margin call? E. Now assume the investor buys $20,000 worth of stock, borrowing $10,000 of the purchase price at an interest rate of 9% per year. The price per share is $100. Compare the returns of the investor with and without buying on margin if; The stock rises by 30% There is no change in stock price The stock falls by 30% What do you notice about buying on margin?
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