INVESTMENT PROBLEMS

1. A stock sells for $15 per share. You purchase 200 shares for $15 a share (i.e., $3000), and after a year the price rises to $22.50.

  1. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 25 percent? Round your answer to one decimal places.________%

 

B.   What will be the percentage return on your investment if you bought the stock on margin and the                 requirement was 50 percent? Round your answer to one decimal places____________%

 

C.        What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 75 percent?   Round your answer to one decimal places.__________%

 

 

 

2. A stock sells for $20 per share. You purchase 200 shares for $20 a share (i.e., for $4,000), and after a year the price falls to $17.50.

 

a. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 25 percent? Round your answer to one decimal places.___________ %

 

b. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 50 percent? Round your answer to one decimal places.___________%

 

c. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 75 percent? Round your answer to one decimal places.___________%

 

(Ignore commissions, dividends, and interest expense.)

3.           You purchase 200 shares of stock at $300 ($60,000); the margin requirement is 40 percent. What are the dollar and percentage returns if

 

a. you sell the stock for $336 and buy the stock for cash? Round your answer to one decimal place.

 

________ %

 

b. you sell the stock for $270 and buy the stock on margin? Round your answer to one decimal place.

 

________%

 

c. you sell the stock for $180 and buy the stock on margin? Round your answer to one decimal place.

 

___________ %

 

4. Investor A buys 200 shares of SLM Inc. at $45 a share and holds the stock for a year. Investor B buys 200 shares on margin. The margin requirement is 60 percent, and the interest rate on borrowed funds is 8 percent.

 

 

 

 

 

a. What is the interest cost for investor A? Round your answer to the nearest dollar.

 

$

 

 

 

 

 

b. What is the interest cost for investor B? Round your answer to the nearest dollar.

 

$

 

 

 

 

 

c. If they both sell the stock for $50 after a year, what percentage return does each investor earn? Round your answer to one decimal places.

 

The percentage return for investor A is ____________ %

 

The percentage return for investor B is ____________ %

 

 

 

5. Investor A makes a cash purchase of 100 shares of AB&C common stock for $45 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $4 a share are distributed. Commissions are 4 percent of the value of a purchase or sale; the margin requirement is 50 percent, and the interest rate is 8 percent annually on borrowed funds.

 

 

 

 

 

a. What is the percentage earned by investor A if he or she sells the stock after one year for $30? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $30? Round your answer to one decimal places.

 

%

 

 

 

 

 

b. What is the percentage earned by investor A if he or she sells the stock after one year for $45? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $45? Round your answer to one decimal places.

 

%

 

 

 

 

 

c. What is the percentage earned by investor A if he or she sells the stock after one year for $50? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $50? Round your answer to one decimal places.

 

%

 

 

 

 

 

d. What is the percentage earned by investor A if he or she sells the stock after one year for $60? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $60? Round your answer to one decimal places.

 

%

 

 

 

 

 

If the margin requirement had been 30 percent, what would have been the annual percentage returns?

 

 

 

 

 

a. What is the percentage earned by investor A if he or she sells the stock after one year for $30? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $30? Round your answer to one decimal places.

 

%

 

 

 

 

 

b. What is the percentage earned by investor A if he or she sells the stock after one year for $45? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $45? Round your answer to one decimal places.

 

%

 

 

 

 

 

c. What is the percentage earned by investor A if he or she sells the stock after one year for $50? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $50? Round your answer to one decimal places.

 

%

 

 

 

 

 

d. What is the percentage earned by investor A if he or she sells the stock after one year for $60? Round your answer to one decimal places.

 

%

 

 

 

What is the percentage earned by investor B if he or she sells the stock after one year for $60? Round your answer to one decimal places.

 

%

 

 

 

6. Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $30 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when it is sold short.

 

 

 

 

 

a. What is the percentage loss if the price of the stock rises to $60? Round your answer to one decimal places.

 

%

 

b. What is the percentage loss if the price of the stock rises to $75? Round your answer to one decimal places.

 

%

 

c. What is the percentage gain if the company goes bankrupt and is dissolved? Round your answer to one decimal places.

 

%

 

d. What is the maximum percentage gain the short seller can earn?

 

-Select-50%100%150%200%There is no limit.

 

 

 

What is the largest percentage loss the short seller can sustain?

 

-Select-50%100%150%200%There is no limit.

 

 

 

e. From the short seller’s perspective

 

1. what is the best case scenarios?

 

-Select-The stock go to $0.The stock rises.

 

 

 

 

 

2. what is the worst case scenarios?

 

-Select-The stock go to $0.The stock rises.

 

 

 

7. An investor sells a stock short for $50 a share. A year later, the investor covers the position at $44 a share. If the margin requirement is 40 percent, what is the percentage return earned on the investment? Round your answer to one decimal places.__________ %

 

 

 

Redo the calculations, assuming the price of the stock is $56 when the investor closes the position. Round your answer to one decimal places._________%

 

 

 

8. A speculator sells a stock short for $55 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $45. What is the percentage return on the position (excluding the impact of any interest expense and commissions)? Round your answer to one decimal places.____________ %

 

 

 

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