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Suppose that you currently have $25000 and you want to buy IBM stock. IBM stock is currently trading at $225. The Broker charges 3% interest rate.

1. If you were to buy on margin, with a 50% margin (the maximum allowed), what would your balance sheet look like?

2. How many shares would you be able purchase if you did not buy on margin.

3. What would be your profit if IBM stock went up to $250 per share? What if IBM went down to $200 a share? How does this compare to not buying on margin?

4. Suppose that the value of IBM stock fell to $70 per share. What would your balance sheet look like? Is there something wrong here?

5. Suppose that your broker sets a minimum maintenance margin of 70%. How far could the value of IBM fall before a margin call?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92827810

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