Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered plan (Plan II). Under Plan
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Answer:
money invest is $3750
amount of loan owned to broker = $1350
when selling price is $40 rate of return = - 29.33%
when selling price is $50 rate of return = - 2.67%
when selling price is $60 rate of return = 24%
Explanation:
given data
No of share = 100
initial selling = $50
borrow = 25%
initial margin purchase = 25%
interest rate = 8%
to find out
How much money invest and How much borrow from broker and rate of return at end of 1 year at (i) $40, (ii) $50, (iii) $60
solution
we know total investment is here
total investment = No of share × initial selling per share
total investment = 100 × 50
total investment = $5000
so
borrow fund is = 0.25 × 5000 = $1250
and Equity invest = total investment - borrow fund
equity invest = 5000 - 1250 = $3750
and
amount of loan own to broker at the end of year is
amount of loan = borrow fund × ( 1 + rate )
amount of loan = 1250 ( 1 + 0.08)
amount of loan owned to broker = $1350
and
selling price here after 1 year is $40
so rate of return is = ........................1
rate of return is =
rate of return = - 29.33%
and
selling price here after 1 year is $50
put here value
rate of return is =
rate of return = - 2.67%
and
selling price here after 1 year is $60 so from equation 1
put the value
rate of return is =
rate of return = 24%