Question

Suppose that Xtel currently is selling at $66 per share. You buy 500 shares using $20,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%. a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $69.63; (ii) $66; (iii) $62.37? What is the relationship between your percentage return and the percentage change in the price of Xtel?

Answer 1

Answer:

The percentage loss will be "-9.08%". The further explanation is given below.

Explanation:

The given values are:

Invested amount

= 20,000

Price of purchase

= $66

Total number of shares

= 500

The borrowed amount will be:

= $(500\times 66)-20000$

= $13,000$

When the price increase to 69.63, the gain will be:

= $69.63-66$

= $3.63$ ($)

The total gain will be:

= $3.63\times 500$

= $1815$

Increase in percentage will be:

= $\frac{1815}{20,000}\times 100$

= $9.08$%

Whereas if price stays quite well at $66, there is really no increase, so the percentage growth would be 0%.  

If the price declines toward a loss of 62,37 per share:

= $62.37-66$

= $-3.63$

Now,

The total loss will be:

= $-3.63\times 500$

= $-1815$

The percentage loss will be:

= $\frac{-1815}{15,000}$

= $-9.08$ (%)