Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The end-of-day prices of GameStop stock on Tuesday Jan 26, Wednesday Jan 27, and Thurs- day Jan 28 are $147.98, $347.51, and $193.60, respectively. For

The end-of-day prices of GameStop stock on Tuesday Jan 26, Wednesday Jan 27, and Thurs- day Jan 28 are $147.98, $347.51, and $193.60, respectively. For simplicity, you assume that it is possible to buy fractional shares.


Question : Now suppose that on Tuesday Jan 26, you feel inspired by information on Wall- StreetBets and hence extremely bullish on GameStop. Not only do you want to buy GameStop stock, but you want to buy on margin. Suppose that your broker requires a margin of 50%. Also, your broker charges you interest at a rate of 0.23% per day. You decide to invest so that your initial margin is 60%. That is, 60% of the purchase is paid for in cash and the rest is borrowed. What is the value of stock that you buy? How many shares did you buy?


Question : Continuing on the above margin question, suppose that you sell at the end of the day on Wednesday Jan 27. What is your return? Compare this to the case where you did not buy on margin.


Question : Suppose that you instead buy GameStop on Wednesday Jan 27 and sell it on Thursday Jan 28. The margin is 50%, borrow fee per day is 0.23%, and your initial margin is still 60%. How many shares did you buy? What is your return? Compare this to the case where you did not buy on margin. What lessons do you learn about buying on margin?

Step by Step Solution

3.30 Rating (156 Votes )

There are 3 Steps involved in it

Step: 1

Question 1 To calculate the value of the stock you bought on Tuesday Jan 26 we need to determine the total value of the purchase and the number of sha... 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

Step: 3

blur-text-image

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

Fundamentals of Investments, Valuation and Management

Authors: Bradford Jordan, Thomas Miller, Steve Dolvin

8th edition

1259720697, 1259720691, 1260109437, 9781260109436, 978-1259720697

More Books

Students also viewed these Finance questions

Question

What procedures can help to protect cash receipts?

Answered: 1 week ago

Question

Identify ways to evaluate the quality of a test.

Answered: 1 week ago