Suppose that xtel currently is selling at $20 per share. you buy 1,000 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: (i) $22; (ii) $20; (iii) $18? what is the relationship between your percentage return and the percentage change in the price of xtel?

% change in net worth = 13.33%

% change in net worth = 0%

% change in net worth = -13.33%

Explanation:

given data

No of shares bought = 1,000    

Current Market Price = $20    

Required funds to purchase = $20 × 1000  = $20,000    

Own funds = $15,000    

Borrowed funds (Deficit) = 5,000    

Rate on margin loan = 8%

solution

we know here that Required funds to purchase is = $20 × 1000  = $20,000   and

net worth = No of shares × Current Market Price of shares - Borrowed funds

so

Current Net worth= 1000 × 20 - 5000

Current Net worth = $15000  

so for price of xtel immediately changes $22

as Net worth at various price levels =  17000

so % change in net worth =

% change in net worth = 13.33%

and

so for price of xtel immediately changes $20

as Net worth at various price levels =  15000

so % change in net worth =

% change in net worth = 0%

and

so for price of xtel immediately changes $18

as Net worth at various price levels =  13000

so % change in net worth =

% change in net worth = -13.33%

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