Question
Suppose that Westen (WN) currently is selling at $80 per share. You buy 250 shares, using $15000 of your own monney and borrow the remainder of the purchase price from your brooker. The rate on the margin loan is 8%
a) what is the percentage increase inn the net worth of your brokerage account if the priveimmediately changes to i) $88, ii)$80, iii)$72? What is the relationship between your percentage return and the percentage change in the price of WN?
b) If the min marigin is 30%, how low can WN's price fall before you get a margin call?
c) how would your answer to b) change if you had financed the intial purchase with only $10,000 of your own money
d) What is the rate of return on your marginal postion (assuming again that you invest $15,000 of your own money) if WN is selling after one year at i)$88, ii)$80, iii)$72? What is the relationship between your percentage return and the percentage change in the price of WN? Assume thaat WN pays no dividends.
e) Continue to assume that a year has passed. How low can WN price fall before you get a margin call?