Hello guys, I have a question and I found an answer but it missing some detailes so I need more explanation on this question please. Part B is missing and Part A, B needs more detailes
Suppose you purchase 1000 shares of Disney stock at $90 per share using margin. Your broker requires an initial cash investment of 60%.
A. If your broker requires a 40% maintenance margin, at what share price will you be subject to a margin call? Show all work.
B. If a margin call does occur, what alternatives do you have?
C. At the end of the year, suppose that the price per share of Disney is $86 and that Disney issued a dividend of $3 per share. Also, suppose that any interest charged on borrowed funds for one year is 10%. Calculate the return on your investment
ANS:
Total amount borrowed by the buyer of 1000 shares of disney stock = (1000 * 90) - (1000 * 90 * 60 %)
= 90000 - 54000
= $ 36,000.
Price of margin call = (36000 / 1000) / (1 - 0.40)
= 36 / 0.60
= $ 60.
Margin call price = $ 60.
Return on investment :-
= [ (1000 * 86) + (1000 * 3) ] - [ (36000 * 10 %) + (1000 * 60) ] / [ (1000 * 60) + (36000 * 10 %) ]
= [ 86000 + 3000 ] - [ 3600 + 60000 ] / [ 60000 + 3600 ]
= (89000 - 63600) / 63600
= 25400 / 63600
= 0.40 i.e., 40 % (approx)
Return on investment = 40 % (approx)
Hello guys, I have a question and I found an answer but it missing some detailes so I need more explanation on this question please. Part B is missing and Part A, B needs more detailes
Suppose you purchase 1000 shares of Disney stock at $90 per share using margin. Your broker requires an initial cash investment of 60%.
A. If your broker requires a 40% maintenance margin, at what share price will you be subject to a margin call? Show all work.
B. If a margin call does occur, what alternatives do you have?
C. At the end of the year, suppose that the price per share of Disney is $86 and that Disney issued a dividend of $3 per share. Also, suppose that any interest charged on borrowed funds for one year is 10%. Calculate the return on your investment
ANS:
Total amount borrowed by the buyer of 1000 shares of disney stock = (1000 * 90) - (1000 * 90 * 60 %)
= 90000 - 54000
= $ 36,000.
Price of margin call = (36000 / 1000) / (1 - 0.40)
= 36 / 0.60
= $ 60.
Margin call price = $ 60.
Return on investment :-
= [ (1000 * 86) + (1000 * 3) ] - [ (36000 * 10 %) + (1000 * 60) ] / [ (1000 * 60) + (36000 * 10 %) ]
= [ 86000 + 3000 ] - [ 3600 + 60000 ] / [ 60000 + 3600 ]
= (89000 - 63600) / 63600
= 25400 / 63600
= 0.40 i.e., 40 % (approx)
Return on investment = 40 % (approx)
