Maurice Tutor

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Category > Management Posted 03 Oct 2017 My Price 7.00

fractional shares.

Show all calcs and formulas For the purposes of this problem, assume that Google pays no dividends. For simplicity, you can also assume that it is possible to buy fractional shares. 1. Suppose that it is the end of the day on December 11, 2009. The current stock price of Google is $590.51. You have $10,000 to invest and decide to buy Google stock. At the end of the day on January 11, 2010, you decide to sell your position in Google stock. What is your return? 2. Now suppose that on December 11, 2009, you are extremely bullish on Google. Not only do you want to buy Google stock, but you want to buy on margin. Suppose that your broker requires a margin of 50%. Also, your broker charges you interest at a rate of 0.03% per day. You decide to invest so that your initial margin is 60%. What is the value of stock that you buy? How many shares did you buy? 3. Continuing on the above margin question: Suppose that you sell at the end of the day on January 11, 2010 [31 days]. What is your return? Compare this to the case where you did not buy on margin. 4. Suppose that you instead held Google until February 11, 2010 [62 days]. What is your return? Compare this to the case where you did not buy on margin. What lessons do you learn about buying on margin? DATE COMNAM PRC 20040819 GOOGLE INC 100.335 20040820 GOOGLE INC 108.31

1. Current price $590.51

Price on Jan, $ 601.11

Return = (601.11 - 590.51)/590.51 = 1.80%

2. Margin = 10000 /(x+10000) = 0.6

so value of x = 6666.67

total in stock = 6666.67+10000 = $16,666.67

Total number of shares bought = $16,666.67/590.91 = 28.22 shares

3. total value = 28.22 * $601.11 per share = $16,965.85

Interest on money borrowed = (6666.67* 1.0003)31

   = $6,728.95

net value after paying interest = $16,965.85 - $6,728.95 = $10,236.9

return = 10236.9/10000-1 = 2.37%

The return in this case is more compared to other situation.

4. Bought on Dec, 11 at $590.51

Sold on Feb 11 at $536.40

Total value of equity = 536.40* 28.22 shares = $15,137.21

Interest = (6666.67* (1.0003)62 = $6791.81

Net value = 15137.21 - 6791.81 = $8,354.4

return = 8354.4 - 10000 / 10000 = - 16.46% (negative)

without buying on margin = (536.40/590.51 )-1 = -9.16%

 

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Maurice Tutor
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Status NEW Posted 03 Oct 2017 08:10 PM My Price 7.00

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