Reference no: EM133075378

Suppose that Tesla Inc stock (TSLA) currently is selling at $799.5 per share. You have $1,380,000 cash in your account. You are bullish on the stock and decided to take a position using all your money. Your financial advisor at TD Bank provided you with two options to invest:

Option one: Open a TFSA account, where you can invest only all your cash to buy the shares.

Option two: Open a margin account, where you can invest with all your cash and also borrow additional amount from your broker to buy the shares. The initial margin requirement is 50%, and the minimum margin requirement is 30%. The interest rate charged on the margin loan will be 9% per year.

With both options, the commission is 50 cents per share for each transaction.

Calculate and answer:

i) With option one, how many shares maximum you can buy with the cash you have in the account?

ii) With option two, how much maximum you can borrow? How many shares maximum you can buy in the margin account?

iii) Suppose in one year, Tesla stock is traded at $1,000 per share and you decide to sell it to realize the profit, after you sell all the shares, what is the Equity value of your account with option one and option two, respectively; what is the rate of return under option one and option two, respectively?

iv) Suppose your prediction is not correct, in one year, Tesla stock declined to $500 per share, what is the margin level in your account with option two? If you do not have sufficient cash in your position, your broker decided to liquidate the position for you with the price of $500 per share, what is the rate of return with option two? What is the rate of return with option one if you liquidate the stock at $500 per share by yourself?

v) Assume two years has passed, how far can Tesla stock to fall for you to get a margin call with option two?

vi) Given the above calculation, briefly state the advantage and disadvantage of trading with margin