Question

You purchase 550 shares of 2nd Chance Co. stock on margin at a price of $55. Your broker requires you to deposit $15,500.

1. Suppose you sell the stock at a price of $62. What is your return? What would your return have been had you purchased the stock without margin? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
With margin %
Without margin %
2. What is your return if the stock price is $54 when you sell the stock? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Omit the "%" sign in your response.)
With margin %
Without margin %

Answer 1

The return on investment (ROI) when purchasing stock on margin versus without depends on the initial investment amount and the selling price of the stock. With margin, the ROI is higher due to using borrowed funds to increase purchasing power, but it also increases the risk of loss. Calculating net profit requires subtracting initial investment and transaction fees from the selling price, then dividing by the initial investment to get the percentage ROI.

Step-by-step explanation:

To calculate the return on the investment with and without margin when you purchase 550 shares of 2nd Chance Co. stock at a price of $55 per share, we first need to consider the initial investment and the selling price. Using margin, the initial investment is $15,500. If the stock price rises to $62, the total selling price is 550 shares × $62, which is $34,100. We also need to subtract the initial investment and any transaction fees to find the net profit. To find the return on investment (ROI), we divide the net profit by the initial investment and multiply by 100 to convert to a percentage.

With margin, the net profit would be $34,100 (selling price) - $15,500 (initial investment) - $20.00 (transaction fees) = $18,580. The return would be ($18,580 ÷ $15,500) × 100 = 119.87%.

Without margin, if you purchased the stock outright, the initial investment would have been $55 × 550 = $30,250. The return would be ($18,580 ÷ $30,250) × 100 = 61.44%.

If the stock price drops to $54 per share, the selling price is 550 × $54 = $29,700. With margin, the net profit would be $29,700 - $15,500 - $20.00 = $14,180. The return would be ($14,180 ÷ $15,500) × 100 = 91.48%.

Without margin, the net profit would be $29,700 - $30,250 = -$550. The return would be (-$550 ÷ $30,250) × 100 = -1.82%.