Homework 3, Chapter 3

You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

28.85

Which of the following are true concerning short sales of exchange-listed stocks? I. Proceeds from the short sale must be kept on deposit with the broker. II. Short-sellers must post margin with their broker to cover potential losses on the position. III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

I & II

A market order has...

Price uncertainty but not execution uncertainty.

Dee Trader opens a brokerage account and purchase 300 shares of Internet Dreams at $40 per share. She borrows $4000 from her broker to help pay for the purchase. Interest rate is 8% a. What is the margin in Dee's account when she first purchases the stock? b1. If price falls to $30, what is her remaining margin b2. If the maintenance margin requirement is 30%, will she recieve a margin call? c. What is the rate of return of her investment

a. $8000 b1. 52% b2. No c. -41.5%

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

$35.71 Equity = 200P - 5,000 Margin = (200P - 5,000)/200P = .30 200P - 5,000 = 60P 140P = 5,000 P = 35.71429

Suppose you short-sell 100 shares of IBX, now selling at $200 per share... a. What is your maximum possible loss? b. What happens to the maximum loss if you simultaneously place a stop-buy order at $210?

a. Unlimited b. $1000

An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was ____.

17% (28-25)400 - .07(5000) / 5000`

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?

23.83%

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been less than ____.

30.29

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

43% 32 - 25 / 25(.65)

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $21 per share. On March 1, a dividend of $3 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15 per share. You paid 50 cents per share in commissions for each transaction. a. Proceeds from short sale? b.Dividend Payment c. What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $15 per share? d. Net Gain

a. $2050 b. $300 c. $1550 d. $200

You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share. a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position? b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Input the amount as a positive value. Round your answer to 2 decimal places.)

a. $2500 b. $57.69

DRK, Inc., has just sold 100,000 shares in an initial public offering. The underwriter's explicit fees were $60,000. The offering price for the shares was $40, but immediately upon issue, the share price jumped to $44. a. What is the total cost to DRK of the equity issue? b. Is the entire cost of underwriting a source of profit to the underwriters?

a. $460,000 b. No

Old Economy Traders opened an account to short-sell 1,000 shares of Internet Dreams at $40 per share. The initial margin requirement was 50%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $40 to $50, and the stock has paid a dividend of $2 per share. a. What is her remaining margin b. What is the margin on the short position c. If the maintenance margin requirement is 40%, will old economy recieve a margin call d. What is the rate of return on the investment

a. $8000 b. 16% b2. Yes c. -60%

Show correct answer You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.) b. How far does the price of Telecom stock have to fall for you to get a margin call if the maintenance margin is 30%? Assume the price fall happens immediately.

a. 12% b. 35.71%

Suppose that Xtel currently is selling at $40 per share. You buy 500 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%. a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to (a) $44; (b) $40; (c) $36? b. If the maintenance margin is 25%, how low can Xtel's price fall before you get a margin call? c. How would your answer to requirement 2 would change if you had financed the initial purchase with only $10,000 of your own money? (Round your answer to 2 decimal places.) d. What is the rate of return on your margined position (assuming again that you invest $15,000 of your own money) if Xtel is selling after one year at (a) $44; (b) $40; (c) $36? (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) e. Continue to assume that a year has passed. How low can Xtel's price fall before you get a margin call? (Round your answer to 2 decimal places.)

a1. 13.33 a2. 0 a3. -13.33 b 13.33 c. 26.67 d1. 10.67 d2. -2.67 d3. -15 e. 14.4