Question
Suppose that Queen Company is currently selling at Php 20 per share. You buy 1000 shares using Php 15,000 of your own money, borrowing the
Suppose that Queen Company is currently selling at Php 20 per share. You buy 1000 shares using Php 15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is at 8%.
a. If the maintenance margin is 25%, how low can Queen companys price fall before you get a margin call?
b. What will your answer be at (a) if you had financed the initial purchase with only Php 10,000 of your own money?
c. Assuming you invested Php 15,000 of your own money, what is your rate of return if Queen Company is selling after 1 year at Php 22 and Php 18? Queen Company does not pay dividends.
d. Assuming you invested Php 15,000 of your own money, how low can Queens price fall before you get a margin call?
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