1.

Step 1: Calculate All Cash Return:

Cash Return % = [(Ending Value / Beginning Equity Position) 1] * 100
= [(($200 * 200) / ($100 * 200)) 1] * 100 = 100%
Step 2: Calculate Leverage Factor:
Leverage Factor = 1 / Initial Margin % = 1 / 0.40 = 2.50
Step 3: Calculate Margin Return:
Margin Transaction Return = All cash return * Leverage Factor = 100% * 2.50 = 250%
Note: You can verify the margin return as follows:
Margin Return % = [((Ending Value - Loan Payoff) / Beginning Equity Position) 1] *
100
= [(([$200 * 200] [$100 * 200 * 0.60]) / ($100 * 0.40 * 200)) 1] * 100
= [ ((40,000 - 12,000) / 8,000) -1] * 100 = 250%
2.
i) Ps = [25(1 + 0.5)] / 1.25Ps = 30.00.
ii) Proceeds from sale = 400 $25 = $10,000
Initial margin requirement = $10,000 50% = $5,000
Total funds in account = $10,000 + $5,000 = $15,000
Total value of securities (TV) = 400 20 = $8,000
Equity = total funds dollars needed to buy back shares = 15,000 8,000 = $7,000
Profit = 7,000 5,000 = $2,000
Return = 2,000 / 5,000 = 40%
3. Expand the table as follows:
As of Beginning of Year
1
Stoc
k

Price Per
# Shares
Share
Outstanding
(in $)

As of End of Year 1
Market
Price Per
# Shares
Market
Capitalization (in
Share
Outstanding Capitalization (in $)
$)
(in $)

Lair

15

10,000

150,000

10

10,000

100,000

Kurl
ew

45

5,000

225,000

60

5,000

300,000

Mo

90

500

45,000

110

500

55,000

we
Tota
l

150

420,000

170

455,000

First, we will calculate the year-end market-weighted index value, then we will calculate
the return percentage.
Value of market-weighted index = [(market capitalizationyear-end) / (market capitalization
beginning of year)]* Beginning index value
= (455,000 / 420,000) * 100 = 108.33
One-Year Return = [(Index valueyear-end / Index valuebeginning of year) -1]* 100
= [ (108.33 / 100) 1] * 100 = 8.33%.
4. In a long stock position, the equation to use to determine a margin call is:
long = [(original price)(1 - initial margin %)]/[1 - maintenance margin %]
= $100(1-0.4)/(1-0.25) = $80
5.
i) Interest on debt is $4000 0.08 = $320
Transaction costs total $180
1% 8000 = $80 in the beginning
1% 10000 = $100 when sold
Profit = 10,000 8,000 320 180 = 1500
Return = 1500/4000 = 37.5%
ii) Interest on debt is $4000 0.08 = $320
Transaction costs total $180
1% 8000 = $80 in the beginning
1% 10000 = $100 when sold
Dividends income = (0.75) (200) = $150
Profit = 10,000 8,000 320 180 + 150 = 1650
Return = 1650 / 4000 = 41.25%