Stock Sells For $15 Per Share; You Purchase 200 Shares For $

Stock Sells For 15 Per Share You Purchase 200 Shares For 15 A S

1. A stock sells for $15 per share. You purchase 200 shares for $15 a share (i.e., $3,000), and after a year the price rises to $22.50. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 25 percent? Round your answer to one decimal places.

What will be the percentage return on your investment if you bought the stock on margin and the requirement was 50 percent? Round your answer to one decimal places.

What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 75 percent? Round your answer to one decimal places.

2. A stock sells for $20 per share. You purchase 200 shares for $20 a share (i.e., for $4,000), and after a year the price falls to $17.50.

a. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 25 percent? Round your answer to one decimal places.

b. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 50 percent? Round your answer to one decimal places.

c. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was 75 percent? Round your answer to one decimal places.

3. You purchase 200 shares of stock at $300 ($60,000); the margin requirement is 40 percent. What are the dollar and percentage returns if:

• a. you sell the stock for $336 and buy the stock for cash?
• b. you sell the stock for $270 and buy the stock on margin?
• c. you sell the stock for $180 and buy the stock on margin?

4. Investor A buys 200 shares of SLM Inc. at $45 a share and holds the stock for a year. Investor B buys 200 shares on margin. The margin requirement is 60 percent, and the interest rate on borrowed funds is 8 percent.

a. What is the interest cost for investor A? Round your answer to the nearest dollar.

b. What is the interest cost for investor B? Round your answer to the nearest dollar.

c. If they both sell the stock for $50 after a year, what percentage return does each investor earn? Round your answer to one decimal places.

The percentage return for investor A is ____________ %

The percentage return for investor B is ____________ %

5. Investor A makes a cash purchase of 100 shares of AB&C common stock for $45 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $4 a share are distributed. Commissions are 4 percent of the value of a purchase or sale; the margin requirement is 50 percent, and the interest rate is 8 percent annually on borrowed funds.

a. What is the percentage earned by investor A if he or she sells the stock after one year for $30? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $30? Round your answer to one decimal places.

b. What is the percentage earned by investor A if he or she sells the stock after one year for $45? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $45? Round your answer to one decimal places.

c. What is the percentage earned by investor A if he or she sells the stock after one year for $50? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $50? Round your answer to one decimal places.

d. What is the percentage earned by investor A if he or she sells the stock after one year for $60? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $60? Round your answer to one decimal places.

If the margin requirement had been 30 percent, what would have been the annual percentage returns?

a. What is the percentage earned by investor A if he or she sells the stock after one year for $30? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $30? Round your answer to one decimal places.

b. What is the percentage earned by investor A if he or she sells the stock after one year for $45? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $45? Round your answer to one decimal places.

c. What is the percentage earned by investor A if he or she sells the stock after one year for $50? Round your answer to one decimal places.

What is the percentage earned by investor B if he or she sells the stock after one year for $50? Round your answer to one decimal places.

d. What is the percentage earned by investor A if he or she sells the stock after one year for $60? Round your answer to one decimal places:

What is the percentage earned by investor B if he or she sells the stock after one year for $60? Round your answer to one decimal places.

6. Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $30 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when it is sold short.

a. What is the percentage loss if the price of the stock rises to $60?

b. What is the percentage loss if the price of the stock rises to $75?

c. What is the percentage gain if the company goes bankrupt and is dissolved?

d. What is the maximum percentage gain the short seller can earn? -Select-50%100%150%200%There is no limit. What is the largest percentage loss the short seller can sustain? -Select-50%100%150%200%There is no limit.

e. From the short seller's perspective 1. what is the best case scenarios? -Select-The stock go to $0.The stock rises. 2. what is the worst case scenarios? -Select-The stock go to $0.The stock rises.

7. An investor sells a stock short for $50 a share. A year later, the investor covers the position at $44 a share. If the margin requirement is 40 percent, what is the percentage return earned on the investment? Round your answer to one decimal places.__________ % Redo the calculations, assuming the price of the stock is $56 when the investor closes the position. Round your answer to one decimal places._________%

8. A speculator sells a stock short for $55 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $45. What is the percentage return on the position (excluding the impact of any interest expense and commissions)? Round your answer to one decimal places.____________ %

Paper For Above instruction

Investing in stocks involves various strategies and considerations, especially when leveraging margin accounts or short selling. Each approach significantly impacts the investor's potential returns and risks. This paper analyzes scenarios involving margin trading, short selling, and the associated return calculations, emphasizing the importance of understanding leverage effects, margin requirements, dividend impacts, and potential risks.

Margin Trading and Its Impact on Returns

Margin trading allows investors to leverage their capital, amplifying both gains and losses. When an investor purchases stocks on margin, they borrow a portion of the investment, which can enhance returns if the stock price appreciates but drastically increase losses if it depreciates. The percentage return on an investment bought on margin depends heavily on the margin requirement and subsequent stock price movement.

For example, in the case where a stock's price rises from $15 to $22.50, the return calculation considering different margin requirements—25%, 50%, and 75%—demonstrates how leverage magnifies gains. With a 25% margin requirement, the investor's return is higher than with 50% or 75%, illustrating the effect of leverage and margin constraints on potential profit.

Impact of Margin on Losses

Conversely, when stock prices fall, margin trading can lead to substantial losses, especially with high leverage. For instance, buying stocks at $20 with a margin requirement of 25%, when the stock drops to $17.50, results in significant percentage losses amplified by leverage, showing how margin can also increase downside risk.

Scenario Analysis of Buying and Selling Stocks

Calculating returns for various purchase and sale scenarios, including buying at different prices and selling at higher or lower prices, illustrates how leverage influences gains or losses. When buying stocks at $300 and selling at $336, with a margin requirement of 40%, the return can be computed considering borrowed funds, dividends, and commissions, highlighting the importance of transaction costs and leverage in investment performance.

Short Selling and Its Risks

Short selling involves selling borrowed stocks in expectation of a decline in price. Ms. Gandhi's decision to short SmallCap Inc at $30, and the subsequent rise to $60 or $75, demonstrates the potential losses, which can exceed initial investments, especially when stock prices rise significantly. Theoretically, the maximum profit is limited to the initial sale price, but the potential losses are unlimited, stressing the high risk in short selling.

Calculating Returns from Short Positions

Short selling returns depend on the difference between the sale price and the buy-back price, adjusted for dividends, interest on borrowed funds, and short sale costs. For example, returning to the scenario where a short sale was made at $50 and closed at $44, the profit is calculated after considering margin requirements and interest costs, underscoring the significance of understanding borrowing costs and dividends.

Conclusion

Overall, leverage, margin, and short selling are powerful tools but come with heightened risks. Proper understanding of these financial instruments and careful scenario analysis help in managing potential gains and losses. Investors must consider margin requirements, dividend impacts, transaction costs, and the unlimited loss potential in short selling to make informed decisions and mitigate risks effectively.

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