Reference no: EM133123664
YOU WILL NEED THE FOLLOWING INFORMATION FOR THESE QUESTIONS:
Anna and Clara are considering buying 500 shares of stock ABC each. ABC stock is currently selling for $100. Anna wants to buy the 500 ABC stocks using $30,000 of her own money and borrowing the remainder amount of the purchase from her broker. Anna's broker will be charging her 8% on the margin loan. Clara wants to buy the 500 ABC stocks by paying the full amount of the purchase from her own money.
a. Given that the minimum margin requirement is a 33% margin ratio. What is the maximum level that stock ABC price can drop into without triggering a margin call?
b. Assume that after one year stock ABC price is equal to $120 and stock ABC did not pay any dividend during the year. What will be Anna's return?
c. Assume that after one year stock ABC price is equal to $120 and stock ABC did not pay any dividend during the year. What will be Clara's return?
d. Assume that after one year stock ABC price is equal to $80 and stock ABC did not pay any dividend during the year. What will be Anna's return?
e. Assume that after one year stock ABC price is equal to $80 and stock ABC did not pay any dividend during the year. What will be Clara's return?
f. Compare Anna's one year returns to Clara's one year returns under the two scenarios (SABC = $120 and SABC = $80). What can you conclude?
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