Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Suppose that Xtel currently is selling at $ 5 4 per share. You buy 4 5 0 shares using $ 1 0 , 0 0

Suppose that Xtel currently is selling at $54 per share. You buy 450 shares using $10,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 7%.
Required:
a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $57.78; (ii) $54; (iii) $50.22? What is the relationship between your percentage return and the percentage change in the price of Xtel?
b. If the maintenance margin is 25%, how low can Xtels price fall before you get a margin call?
c. How would your answer to (b) change if you had financed the initial purchase with only $12,150 of your own money?
d. What is the rate of return on your margined position (assuming again that you invest $10,000 of your own money) if Xtel is selling after 1 year at: (i) $57.78; (ii) $54; (iii) $50.22? What is the relationship between your percentage return and the percentage change in the price of Xtel? Assume that Xtel pays no dividends.
e. continue to assume that a year has passed. How low can Xtels price fall before you get a margin call?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dark Finance

Authors: Fabio Mattioli

1st Edition

1503611655, 978-1503611658

More Books

Students also viewed these Finance questions

Question

Explain the international strategy of Root Capital.

Answered: 1 week ago

Question

How to reverse a Armstrong number by using double linked list ?

Answered: 1 week ago

Question

Be familiar with the integrative servicescape model.

Answered: 1 week ago

Question

Determine the roles of spatial layout and functionality.

Answered: 1 week ago