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Manal Elkhoshkhany, Bachelor's Degree

Category: Multiple Problems

Satisfied Customers: 9745

Experience: Completed by BA degree in 1988 and graduated with a GPA of 4.0

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You purchase 100 shares of stock at $100 ($10,000); the margin

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You purchase 100 shares of stock at $100 ($10,000); the margin requirement is 40 percent. What are the dollar and percentage returns if 1. a) you sell the stock for $112 and buy the stock for cash? 2. b) you sell the stock for $90 and buy the stock on margin? 3. c) you sell the stock for $60 and buy the stock on margin? (a)Initial investment = 10,000 Final value = 11,200 Dollar return = 11,200-10,000 = 1,200 Percentage return = 1200/10000*100 = 12% (b)Initial investment = 4,000 (6,000 on margin) (Total 10000) Final value = 3,000 (6,000 on margin) (Total 9000) Dollar return = 3,000-4,000 = -1,000 Percentage return = -1000/4000*100 = -25% (c)Initial investment = 4,000 (6,000 on margin) (Total 10000) Final value = 0 (6,000 on margin) (Total 6000) Dollar return = 0-4,000 = -4,000 Percentage return = -4000/4000*100 = -100% 7. An investor sells a stock short for $36 a share. A year later, the investor covers the position at $30 a share. If the margin requirement is 60 percent, what is the percentage return earned on the investment? Redo the calculations, assuming the price of the stock is $42 when the investor closes the position. 8. A speculator sells a stock short for $50 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $42. What is the percentage return on the position (excluding the impact of any interest expense and commissions)? See the Point of Interest titled “The Short Sale and Dividends.” Chapter 4: problems 1, 2, 4, 9, 17, 19, 22, 25. 1. A saver places $1,000 in a certificate of deposit that matures after 20 years and that each year pays 4 percent interest, which is compounded annually until the certificate matures. 1. a) How much interest will the saver earn if the interest is left to accumulate? 2. b) How much interest will the saver earn if the interest is withdrawn each year? 3. c) Why are the answers to (a) and (b) different? 2. An investor bought a stock ten years ago for $20 and sold it today for $35. What is the annual rate of growth (rate of return) on the investment? 4. A saver wants $100,000 after ten years and believes that it is possible to earn an annual rate of 8 percent on invested funds. (a) What amount must be invested each year to accumulate $100,000 if (1) the payments are made at the beginning of each year or (2) if they are made at the end of each year? (b) How much must be invested annually if the expected yield is only 5 percent? 9. You are offered $900 five years from now or $150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you ac- cept? If you can earn 14 percent on your funds, which offer will you accept? Why are your answers different? 17. A township expects its population of 5,000 to grow annually at the rate of 5 per- cent. The township currently spends $300 per inhabitant, but, as the result of inflation and wage increments, expects the per capita expenditure to grow annu- ally by 7 percent. How much will the township’s budget be after 10, 15, and 20 years? 19. Suppose you purchase a home for $150,000. After making a down payment of $50,000, you borrow the balance through a mortgage loan at 8 percent for 20 years. What is the annual payment required by the mortgage? If you could get a loan for 25 years but had to pay 9 percent annually, what is the difference in the annual payment? 22. You want $100,000 after eight years in order to start a business. Currently you have $26,000, which may be invested to earn 7 percent annually. How much ad- ditional money must you set aside each year if these funds also earn 7 percent in order to meet your goal of $100,000 at the end of eight years? By how much would your answer differ if you invested the additional funds at the beginning of each year instead of at the end of each year? 25. Which is the better choice when purchasing a $20,000 car: 1. a) a four-year loan at 4 percent, 2. b) an immediate rebate of $2,000 and a four-year loan at 10 percent?

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