Question

Suppose that xtel currently is selling at $20 per share. you buy 1,000 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: (i) $22; (ii) $20; (iii) $18? what is the relationship between your percentage return and the percentage change in the price of xtel?

Answer 1

% change in net worth = 13.33%

% change in net worth = 0%

% change in net worth = -13.33%

Step-by-step explanation:

given data

No of shares bought = 1,000

Current Market Price = $20

Required funds to purchase = $20 × 1000 = $20,000

Own funds = $15,000

Borrowed funds (Deficit) = 5,000

Rate on margin loan = 8%

solution

we know here that Required funds to purchase is = $20 × 1000 = $20,000 and

net worth = No of shares × Current Market Price of shares - Borrowed funds

so

Current Net worth = 1000 × 20 - 5000

Current Net worth = $15000

so for price of xtel immediately changes $22

as Net worth at various price levels = 17000

so % change in net worth =
`((17000-15000))/(15000)`

% change in net worth = 13.33%

and

so for price of xtel immediately changes $20

as Net worth at various price levels = 15000

so % change in net worth =
`((15000-15000))/(15000)`

% change in net worth = 0%

and

so for price of xtel immediately changes $18

as Net worth at various price levels = 13000

so % change in net worth =
`((13000-15000))/(15000)`

% change in net worth = -13.33%