Question

Suppose that XTel currently is selling at $40 per share. You buy 500 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 (a) $44; (b) $40; (c) $36? (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.)

Answer 1

Answer:

Explanation:

a. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to $44?

Total investment will be:

= 500 shares x $40 = $20,000

The Initial Net Worth =$15,000

Borrowed Amount = $20,000 - $15,000 = $5,000

New Net worth will be:

= $44 x 500 shares - 5000

= $22,000 - $5000

= $17,000

Percentage increase will be:

= [($17,000 - $15,000)/$15,000] × 100

= $2000/$15000 × 100

= 13.33%

b. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to $40?

Total investment will be:

= 500 shares x $40 = $20,000

The Initial Net Worth =$15,000

Borrowed Amount = $20,000 - $15,000 = $5,000

New Net worth will be:

= $40 x 500 shares - 5000

= $20,000 - $5000

= $15,000

Percentage increase will be:

= [($15,000 - $15,000)/$15,000] × 100

= 0/$15000 × 100

= 0

c. What is the percentage increase in the net worth of your brokerage account if the price of XTel immediately changes to $36?

Total investment will be:

= 500 shares x $40 = $20,000

The Initial Net Worth =$15,000

Borrowed Amount = $20,000 - $15,000 = $5,000

New Net worth will be:

= $36 x 500 shares - 5000

= $18,000 - $5000

= $13,000

Percentage increase will be:

= [($13,000 - $15,000)/$15,000] × 100

= -$2000/$15000 × 100

= -13.33%