BUS 315 Lecture 1: Assn_ICA1

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BUS315E100Summer2016
In‐ClassAssignment#1
StudentID:
StudentName:
Youhave$200,000andwouldliketouseyourmarginaccounttoinvestin10,000
sharesofAbbeyRoad.Thestockiscurrentlysellingatapriceof$40pershare.You
estimatethatthestockwillbesellingatapriceof$60inoneyear.Theinterestrate
onmarginloansiscurrently7%.
a. Whatistheinitialmarginratio?
b. Whatwouldbetheexpectedreturn(%)ontheinvestmentifyourestimateis
correct,assumingthatyouusedtheinitialmarginof50%?Prepareanaccount
balancesheetasifyourestimateiscorrect
c. Atwhatpricewouldyougetamargincallinoneyearassumingtheminimum
marginwas30%?
a.InitialMargin=$200,000/(10,000*$40)=50%
b. 
AssetsLiabilities&
Shareholders’equity
Stock $400,000 Borrowing $200,000
=$40*10000 Equity(50%initial
margin)
200,000
AssetsLiabilities&
Shareholders’equity
Stock $600,000 Borrowing $200,000
=$60*10,000 Interest(=7%*$200,000) $14,000
Equity $386,000
Return=(386,000‐200,000)/200,000=93%
c.MarginCallPrice:(10,000P‐200,000‐(7%*$200,000))/10,000P=0.3
P=$30.57
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