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Find percentage increase in the net worth

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Reference no: EM132635084

Suppose that Intel is currently selling at $40 per share. You buy 250 shares by using $7,500 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 10% per annum.

a. What is the percentage increase in the net worth (or return on equity) of your brokerage account if the price of Intel immediately changes to (i) $46; (ii) $34?

b. If the maintenance margin is 25%, how low can Intel stock price fall before you get a margin call?

c. How would your answer to (b) change if you had financed the initial purchase with only $5,000 of your own money?

d. What is the rate of return on your margined position (assuming again that you invest $7,500 of your own money) if Intel is selling after one year at (i) $46; (ii) $34?

e. What is the relationship between your percentage return and the percentage change in the price of Intel in (d), assuming that Intel pays no dividends?

Reference no: EM132635084

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