CONNECT WITH LEARNSMART FOR BODIE: ESSE
CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196246
Author: Bodie
Publisher: MCG
Question
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Chapter 3, Problem 24C
Summary Introduction

(A)

Introduction:

Margin in stock purchasing means the portion of the purchase price is contributed by investor, the remaining is borrowed from the broker. Thus it describes stock purchased with money borrowed in part from broker.

Requirement 1:

To calculate percentage change in net worth if price of each share changes to $44

Expert Solution
Check Mark

Explanation of Solution

Adequate Information:

Market price of each share- $40

Number of shares purchased- 500

Money in hand - $15000

Loan rate - 8%

Calculate:

Calculation of percentage increase in net worth if selling price changes to $44

Market value of shares = market price of each share × number of shares purchased                                     = $40×500shares                                     = $20000Loan amount = market value of shares-Money in hand                     = $20000-$15000                     = $5000Net worth before price change = market value of shares-loan amount                                                 = $20000-$5000                                                 = $15000If price of each share is $44, the value= market price of each share×number of shares purchased                                                            = $44×500shares                                                            = $22000Percentage change in price =$22000-$20000$20000×100=10%Net worth if price of each share changes to $44 = ($44×500 shares)-$5000                                                                            = $17000Percentage Gain=Net worth after price changeNet worth before price change-1×100=$17000$15000-1×100=13.33%Ratio of percentage change in price and percentage return=0.100.133=0.75

Conclusion

Thus the percentage gain is 13.33% if the price of each share changes to $44 and the ratio of percentage change in return with percentage change in price is 0.75

Summary Introduction

(B)

Introduction:

Margin in stock purchasing describes stock purchased with money borrowed in part from broker. It is calculated as:

Margin=Equity in accountValue of Stock

Where equity in account = Value in stock − Loan from broker.

Expert Solution
Check Mark

Explanation of Solution

Adequate information:

Margin- 25%

Number of shares purchased- 500

Loan amount = $5000

To calculate Xtel's share price if the Margin is 25 %

Calculation of price of each share if Margin is 25%Equity in account = Value of stock  Loan from broker                               = 500×P$5000 Margin=Equity in accountValue of stock 0.25    = 500×P$5000500×P      P    = $13.33

Conclusion

Thus the price of share will be $13.33 when the margin is 25%.

Summary Introduction

(C)

Introduction:

Margin in stock purchasing describes stock purchased with money borrowed in part from broker. It is calculated as:

Margin=Equity in accountValue of Stock

Where equity in account = Value in stock − Loan from broker.

Also, Loan from broker = Market value of shares − Money in hand.

Expert Solution
Check Mark

Explanation of Solution

Adequate information:

Margin- 25%

Number of shares purchased- 500

Money in hand -$10000

To calculate Xtel's share price if the Margin is 25 %

Calculation of price of each share if margin is 25% and money in hand is $10000

Loan from broker = Market value of shares – Money in hand.                               = $20000-$10000                               = $10000Equity in account = Value in stock – Loan from broker                               = 500×P - $10000           Margin         = Equity in accountValue of stock                  0.25      = 500×P-$10000500×P                    P         = $26.67

Conclusion

Thus the price of share will be $26.67 when the margin is 25% and money in hand is $10000.

Summary Introduction

(D)

Introduction:

Margin in stock purchasing describes stock purchased with money borrowed in part from broker. The loan from broker is:

Loan from broker = Market value of shares − Money in hand.

Requirement 1:

To calculate rate of return if price of each share is changed after one year to $44

Expert Solution
Check Mark

Explanation of Solution

Adequate Information:

Money in hand -$15000

Number of shares- 500

Loan rate- 8%

Market price of each share- $40

Conclusion

Thus the percentage return if price of each share changes to $ 44 is 10.67% and the ratio of percentage change in price and return is 0.93.

Summary Introduction

(E)

Introduction:

Margin in stock purchasing describes stock purchased with money borrowed in part from broker. It is calculated as:

Margin=Equity in accountValue of Stock

Where equity in account = Value in stock − Loan from broker.

Expert Solution
Check Mark

Explanation of Solution

Adequate Information:

Money in hand -$15000

Number of shares- 500

Loan rate- 8%

Market price of each share- $40

To calculate Xtel's share price after one year if the Margin is 25 %

Calculation of price of each share after one year if Margin is 25%After one year loan payment = loan amount +loan rate×loan amount                                              =$5000 + (0.08×$5000)                                              = $5400For 500 shares and margin at 25%, now the price of each share will be calculated as: Margin=Equity in accountValue of stock 0.25    = 500×P$5400500×P  P       = $14.40

Conclusion

Thus the price of share will be $14.40 when the margin is 25% after one year.

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