(A) Tom and Mary have each decided to buy 100 shares of a high performing Internet stock. The current price of the stock is $240 per share. Tom places a market order while Mary has decided to place a limit order at $230 per share. One week later, the price of the stock never did decline but rose steadily to $305 per share.
Question 1: At least on paper, how much profit or loss would Tom show after one week? Ignore transaction costs. Show your work.
Question 2: Determine the profit or loss that Mary has made after one week, again ignoring transaction costs. Show your work.
Question 3: If the stock had dipped in price to $230 prior to reaching $305 by week's end, what would have been Mary's profit or loss?
(B) You are thinking of purchasing a stock that is currently priced at $120 per share. It pays an annual dividend of $5.00 per share.
Question 1: Assume that you buy the stock on margin paying $80 per share and borrowing the rest from your broker at 8.0% annual interest. You hold the stock for one year and then sell it for $150 per share. Calculate your return on the stock.
Question 2: Rework question 1, but assume that after holding the stock for one year, you sell it for $70 (instead of $150). Now what is the return on your stock?
Question 3: Rework question 1 again but assume that you instead decide to use your personal funds rather than buying on margin to make the stock purchase. Determine what the return on your stock.