Question

Suppose that Xtel currently is selling at $66 per share. You buy 500 shares using $20,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 6%. a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $69.63; (ii) $66; (iii) $62.37? What is the relationship between your percentage return and the percentage change in the price of Xtel?

Answer 1

The percentage loss will be "-9.08%". The further explanation is given below.

Step-by-step explanation:

The given values are:

Invested amount

= 20,000

Price of purchase

= $66

Total number of shares

= 500

The borrowed amount will be:

=
`(500* 66)-20000`

=
`13,000`

When the price increase to 69.63, the gain will be:

=
`69.63-66`

=
`3.63` ($)

The total gain will be:

=
`3.63* 500`

=
`1815`

Increase in percentage will be:

=
`(1815)/(20,000)* 100`

=
`9.08`%

Whereas if price stays quite well at $66, there is really no increase, so the percentage growth would be 0%.

If the price declines toward a loss of 62,37 per share:

=
`62.37-66`

=
`-3.63`

Now,

The total loss will be:

=
`-3.63* 500`

=
`-1815`

The percentage loss will be:

=
`(-1815)/(15,000)`

=
`-9.08` (%)