Question

Tony purchased 100 shares of T-Rex stock for $43 a share. On the same day, Sam also purchased 100 shares of T-Rex stock for $43 a share. Tony paid cash for his purchase while Sam used margin. The initial margin requirement on this stock is 60% while the maintenance margin is 40%. Both Tony and Sam sold their shares after eight months at a price of $40 a share. The stock pays no dividends. Tony had a holding period percentage return of ________% as compared to Sam's ________% return. Ignore margin interest and trading costs.

Answer 1

Answer and Explanation:

The computation is shown below:

For Tom, without margin is

= Number of shares × (price after eight months - purchased value) ÷ ( number of shares × purchased value)

= (100 × ($40 - $43) ÷ (100 × $43)

= -6.98%

For sam, with margin is

= Number of shares × (price after eight months - purchased value) ÷ ( number of shares × purchased value × initial margin requirement )

= (100 × ($40 - $43) ÷ (100 × $43 × 60)

= -11.63%