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Suppose that Xtel currently is selling at $20 per share
Suppose that Xtel currently is selling at $20 per share. You buy 1,000 shares using $15,000 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 8%.
a. What is the percentage increase in the net worth of your brokerage account if the price of Xtel immediately changes to: (i) $22; (ii) $20; (iii) $18? What is the relationship between your percentage return and the percentage change in the price of Xtel? (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)
Expert Solution
| Computation of Percentage Increase in Net Worth: | |||
| Price | $22 | $20 | $18 |
| Value of Investment (1,000*$22; 1,000*$20; 1,000*$18) | $22,000 | $20,000 | $18,000 |
| Borrowed Funds (($20*1,000)-$15,000) | 5000 | 5000 | 5000 |
| Net Worth | $17,000 | $15,000 | $13,000 |
| % Return on Investment | 13.33% | 0.00% | -13.33% |
| = ($17,000-$15,000)/$15,0000 | = ($15,000-$15,000)/$15,0000 | = ($13,000-$15,000)/$15,0000 | |
| % Increase in Stock Price | 10.00% | 0.00% | -10.00% |
| =(22-20)/20 | =(20-20)/20 | =(18-20)/20 |
Positive relationship. If price rise return rise and vise versa and higher the change in return compared t change in price.
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