BU111 Lecture Notes - Lecture 10: Capital Gain, Equites

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BU111–Lecture10–EconomicFactorsandCanadianFinancialSystem
Therolesofthe4pillarsforbusinessfinancing
Leverage
Allowsyoutoachievemore
Engageinatransactionwhosevalueisgreaterthantheactualdollarsyouhave
available
Createpotentialtomakealargerreturnorlossthanindicatedbytheinvestmentyou
havemade
Examples:
oSellingshort–deposit50%ofvalueoftransaction
oBuyingonmargin–investpartofvalueoftransaction(marginrequirement),
brokerlendstherest
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Comparisonoflongandmarginbuy
Example:xyzistrading@$45.Youhave$6,300toinvest.Theminimummarginrequirementis
70%.Annualinterestonthemarginloanis10%.Ineachscenario,yousellat$553months
later.
A) Whatisyourcapitalgainifyougolongandpurchasethestockwithyourmoneyonly?
B) Whatisyourcapitalgainifyouutilizethefullmarginandborrowfundsfromthebroker?
(assumebrokerscommissionfeesis2%onbuyandsell)
A) Golong–purchase$6,300/$45=140shares
Sell140shares@=
$7,700
Boughtfor
$6,300
$1,400
Less:2%(purchasecomm.)
126
2%(salecomm.)
156
Capitalgain
$1,120
Yield=$1,120/$6,300=17.8%
B) Usefullmargin
a. Minimummarginrequirementis70%(yourinvestmentmustbe70%ofcurrent
marketvalue;brokerwillingtolend30%ofCMV)
b. LetCMVofinvestmentbe‘x’
i. 70%x=$6,300 x=$9,000
c. Brokerwilllend$9,000$6,300=$2,700(30%)
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