Question

Suppose that XTel currently is selling at $60 per share. You buy 1,000 shares using $48,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.

Required:
What is the percentage increase in the net worth of your brokerage account if the price of XTel immediatelychanges to (a) S66: (b) $60; (c) S54?

Answer 1

a. 12.50%

b. 5%

c. -12.50%

Step-by-step explanation:

Purchase value of share = 1000 shares x $60 = $60000

Own money used for pruchase = $48000

Loaned money = 60000 - 48000 = $12000

a. Percentage increase in net worth = (66x1000 - 12000 - 48000) / 48000 = 12.50%

b. Percentage increase in net worth = (60x1000 - 12000 - 48000) / 48000 = 0%

a. Percentage increase in net worth = (54x1000 - 12000 - 48000)/48000 = -12.50%