Investments Chapter 3

Finance 431 Homework Chapter 3

Do all calculations using 9 decimal places, retain the 9 decimal places throughout the calculations, then when you report answers round to 2 decimal places. Examples: If the answer is in years; i.e. 9.55769321 report 9.56. If the answer is in dollars. i.e. $56,987.55555 report to the nearest cent 56,987.56. If the answer is in percent terms, i.e. .104478324, then report 10.45. You need to be very precise with rounding and reporting.

1. You sell short 100 shares of Merck at $48.43 per share. One week following your short sale, Merck announces it has found the cure for cancer and its stock price increases to $750 per share.

1a. If you choose to cover your short position when the price is $750, what is your total gain or loss (-)? (total gain or loss, not per share gain or loss)

$_-70157______ (9 points)

1b. Assume you placed a stop buy order at $100 when you sold short. Assume the stop buy order executed at $100. What is your total gain or loss (-)?

$_-5157____ (9 points)

2. You open a brokerage account and purchase 200 shares of Google at $881.25 per share. You borrow 40% from your broker to help pay for the purchase. The interest rate on the loan is 8%.

2a. What is the initial loan amount in your account?

$__70500____ (9 points)

2b. What is the initial margin balance?

$_105750_____ (9 points)

2c. Assume the day after your stock purchase, Google announces abysmal quarterly earnings. If the maintenance margin requirement is 30%, at what share price will you receive a margin call?

$_503.57____ (9 points)

2d. One year after purchase, Google’s price is $795. What is your new margin balance? (Include interest expense in your calculation.)

$__82860___ (9 points)

2e. Using the facts from 2d, assume you sell your stock one year after purchase. What is your rate of return?

_-21.64539____% (9 points)

3. You open a brokerage account and sell short 500 shares of Apple Computer at...