Question

Dée Trader opens a brokerage account and purchases 300 shares of Internet Dreams at $36 per share. She borrows $4,500 from her broker to help pay for the purchase. The interest rate on the loan is 11%. a. What is the margin in Dée’s account when she first purchases the stock? b. If the share price falls to $26 per share by the end of the year, what is the remaining margin in her account? (Round your answer to 2 decimal places.) c. If the maintenance margin requirement is 30%, will she receive a margin call? Yes No d. What is the rate of return on her investment? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)

Answer 1

Answer:

A) Dee´s Margin = 58.33%; B) Remaining Margin if price drops to $26 is 30.56% C) She won´t receive a margin call (but close...)

D) Rate of Return = - 32.36%

Explanation:

Hi, first let´s find out what the initial margin is, for that we have to use the following formula.

$Margin=\frac{Equity}{ValueStocks}$

Now, in order to find the equity, we have to find the total value of the stocks and substract the debt from it, since it was 300 shares at $30 per share, the total value of the investment is $7,800, therefore, its equity is $3,300 ($7,800-$4,500).

So everything should look like this

$Margin=\frac{6,300}{10,800} =0.5833$

So the initial margin was 58.33%

If the price drops to $26 by the end of the year, the remaining margin in her account is:

$Margin=\frac{3,300}{10,800} =0.3056$

So the remaining margin one year later, after the stock price dropped to $26 was 30.56%

Now, in order to find the rate of return on her investment, at the end of the year, we have to remember that the money loaned was at 11%, therefore, the best way to find out the return of this investment is to convert this into money, like such.

First (Gross Return of the stock)

$Gross Return=\frac{Final.P-Initial.P}{Initial.P} x100$

$Gross Return=\frac{26-36}{36} x100=-0.2778$

Ok, we have the gross return, which is -$27.78%

The interest expenses are just as follows.

$Interest Expense=4,500*0.11=-495$

To find the return on the investmen, we need to use the following formula.

$RateReturn=\frac{FinalInvestment-InitialInvestment}{InitialInvesment} x100$

The final investment is: Gross return($)+interest Expenses

$FinalInvest=\frac{300*(-10)+(-4,500*0.11)}{10,800} =-0.3236$

This means that, by the end of the year, her return on the investment was -32.36%. In money, this is - $3,495.

Best of luck.