Updated Additional Margin Buying Problems
Utilize a 2% commission IN (purchase commission) and a 2% commission OUT (sale
commission) for all transactions.
1. You are bullish about WMX and instruct your broker to buy as many WMX
shares as possible utilizing the full margin. She informs you that your margin
requirements are 60%. WMX is currently trading at $20/share and you have
$2,400 available to invest. If you sell your shares at a stock price of WMX rises
to $28/share, what will be the amount of your capital gain and what yield would
2. You receive a hot stock tip about LBD and believe it will rise in value. You have
$3,200 available to invest and your broker has approved you for a 50% margin
requirement. You instruct your broker to buy as many shares as possible using
the full margin. LBD is trading at $8/share today.
a) How many shares can you purchase by using the full margin available?
b) What would your capital gain and yield be if LBD rose to $17/share and
you sold at that price?
3. Your fellow classmate was so persuasive in his investment presentation that
you’ve decided to buy as many RIM shares as you can. You are approved for
a margin account with a 70% margin requirement. You have $1,400
available to invest and RIM is currently trading at $20/share. To your
delight, your brilliant classmate was right and RIM stock rises to $35/share.
What is your capital gain and yield? Solutions
1. Let total amount invested be ‘x’, Marg