How many abc shares can purchase using the strategy

Assignment Help Accounting Basics

Reference no: EM132784295

Juliette and Jason are in their mid 40's and married with 4 teenage children. They have $50,000 in surplus funds which they would like to invest in company ABC as they believe this to be a solid company with healthy dividends. Although purchasing shares in only one company does not offer the diversification, and will increase the risk of the investment, Juliette and Jason are diversified in their superannuation funds and this keeps it simple for illustrative purposes. The problem is that Juliette has a much greater tolerance for risk than her husband. She is prepared to borrow 70% of the value of the total investment. Jason on the other hand is only prepared to borrow 50% of the value of the total investment.

ABC shares are currently trading at $5 per share.
As their adviser, you have already explained to them how margin lending works.
They want to know how heavily exposed they will be in the event that the market falls by 20%.
Complete the following questions to show Juliette and Jason the impact on a margin loan if they adopt Juliette's more aggressive strategy compared to Jason's more conservative strategy.

Assumptions

Current loan interest rate is 6.4%
Maximum lender loan to value ratio is 70%
Buffer is 6%

Required:

Using Jason's strategy of investing $50,000 of their own funds, and taking out a margin loan with a loan to value ratio of 50%:

Problem 1: What will be the total amount of the margin loan?

Problem 2: Using Jason's strategy, how many ABC shares can they purchase using this strategy (ignoring brokerage)?

Problem 3: If, the very next day, the price of ABC shares drops 20% to $4 per share, what is the new LVR using Jason's strategy?

Problem 4: Explain to Juliette and Jason, the consequences of the different outcomes depending on whether they use Juliette's strategy or Jason's strategy.

Reference no: EM132784295

Questions Cloud

How does an auditor gain the competence or capability : How does an auditor gain this competence or capability? What are two ways in which an auditor fulfills these responsibilities when completing an audit?

What the effective annual interest rate associated with loan : Requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is

What is the relevance of the study to the accounting student : What is the relevance of the study to the accounting students and professionals? The impact of technological advancement on the Accounting System

When do use asset method and expense method in adjusting : When do you use asset method and expense method in adjusting entries? And when do you use income method and liability method in adjusting?

How many abc shares can purchase using the strategy : Explain to Juliette and Jason, the consequences of the different outcomes depending on whether they use Juliette's strategy or Jason's strategy.

What will be the total amount of the margin loan : Juliette and Jason, If, the very next day, the price of ABC shares drops 20% to $4 per share, what is the new LVR using Juliette's strategy?

What attributes attract people to jobs : What attributes attract people to jobs and How are financial institutions adapting the services they provide to meet recent legislation

Which of the accounting for share buy-backs is prescribed by : Which of the following statements relating to shares is not correct? Which of the Accounting for share buy-backs is prescribed by

What the journal entry that would be recorded is : The exercise price on the options was $2 per share. If all options were exercised on the due date, the journal entry that would be recorded is

User Account

All Pages