Activity (Chapter 3) Flashcards
You have an investment in an equity-index fund. The fund currently sells for Php 100 per share. The price per share at the end of the year is Php 110 and cash dividends over the year is Php 5. Holding period is one year.
HPR = (110- 100 + 5)/100
= 0.15 or 15%
- Maintenance margin 30%
- Shares purchased on margin = 1000 shares
- loan from broker = Php 40,000.00
At what stock price will the investor get a margin call?
(1,000P – 40,000)/1,000P = 0.30
1,000P-40,000 = 0.30(1,000P)
1,000P-40,000 = 300P
1,000P-300P = 40,000
(700P/700) = (40,000/700)
P= Php 57.14
- Selling at Php 22
- No Dividends
- loan from broker = Php 5,000.00
- rate on the margin loan = 8%
- Rate of return after a
Capital gains on stock = shares purchased (ending price – initial stock price)
= 1000 (22-20)
= 1000 (2) = Php 2,000.00
Interest on margin loan = amount borrowed (rate on margin loan)
= Php 5,000 (.08)
= Php 400.00
Net Income
= Capital gains on stock - Interest on margin loan
= Php 2,000 – 400
= Php 1, 600.00
Return on investment = net income from investment / initial investment
= Php 1,600 / 15,000
=10.67%
You bought 400 shares of White stocks initially selling at Php 50 with an initial margin on your purchase price of 50%. You borrowed the remainder from your broker with an interest rate on margin loans at 8%. White stocks are giving dividends at Php 0.6 per share during the 6-months holding period.
a. how much did you borrow from the broker?
Value of stocks = Php 50 per share (400 shares)
= Php 20,000
Initial Equity Investment = Php 50 (400 shares) (50% initial margin)
= Php 10,000
Initial Equity Margin = equity/ value of stocks
= 10,000/20,0000
=50%
Amount borrowed = value of stocks – initial equity investment =20,0000 -10,000
= 10,000
You bought 400 shares of White stocks initially selling at Php 50 with an initial margin on your purchase price of 50%. You borrowed the remainder from your broker with an interest rate on margin loans at 8%. White stocks are giving dividends at Php 0.6 per share during the 6-months holding period.
b. What will be your rate of return if the stock price will be at Php 40 at the end of a 6-months holding period?
Capital gains on stock = shares purchased (ending price – initial stock price)
= 400 (40-50)
= 400 (-10)
= -Php 4,000.00
Dividends = shares purchased (dividends per share)
= 400 (0.6)
= Php 240.00
Interest on margin loan = amount borrowed (rate on margin loan)(time)
= Php 10,000 (.08)(6/12)
= Php 400.00
Net Income = Capital gains on stock + Dividends - Interest on margin loan
= -Php 4,000 +240 – 400
= -Php 4,160.00
Return on Investment = net income / initial investment
= -php 4,160 / 10,000
=-41.60%
You bought 400 shares of White stocks initially selling at Php 50 with an initial margin on your purchase price of 50%. You borrowed the remainder from your broker with an interest rate on margin loans at 8%. White stocks are giving dividends at Php 0.6 per share during the 6-months holding period.
c. What will be your rate of return if the stock price will be at Php 55 at the end of a 6-months holding period?
Capital gains on stock = shares purchased (ending price – initial stock price)
= 400 (40-50)
= 400 (-10)
= -Php 4,000.00
Dividends = shares purchased (dividends per share)
= 400 (0.6)
= Php 240.00
Interest on margin loan = amount borrowed (rate on margin loan)(time)
= Php 10,000 (.08)(6/12)
= Php 400.00
Net Income = Capital gains on stock + Dividends - Interest on margin loan
= -Php 4,000 +240 – 400
= -Php 4,160.00
Return on Investment = net income / initial investment
= php 1,840 / 10,000
= 18.40%
Ducks corporation acquired 10,000 Swans Company shares on February 5, 2021 at Php 50 which included Php 10 per share broker’s fees and commissions. The shares were selling at Php 32 per share on December 31, 2021. The investments were designated for trading. How much is the initial carrying value of the investment on the date of acquisition and why?
Carrying value stocks held for trading:
= (Php 50 – Php 10)(10,000 shares)
= Php 40 (10,000 shares)
=Php 400,000
