1. Assume you buy 800 shares of a stock selling for $15 a share, borrowing $4,000 at an interest rate of 6% to help finance the purchase. Your account has a maintenance margin of 40%.
A. At what price would you receive a margin call?
B. If, after one year, the price increased to $20 a share, what would be your rate of return?
2. Assume the risk-free rate of return is 6%, the expected rate of return on the market portfolio is 13%, and the beta of Psy Corp. is 1.3. Psy has earnings of $8 per share that are expected to grow 5% a year and pays them all out to stockholders.
A) What is the value of a share of Psy?
B) Assume Psy has an investment opportunity that will yield a return of 20% and decides to reduce the dividend payout ratio to 50% and devote the rest of their earnings to the investment. Calculate the new value of Psy stock.
C) Assume you buy the stock at a price of $70 and expect to sell it in a year. If the stock’s market price is at its intrinsic value in one year, what is your expected holding period return on the stock (using the assumptions in part B)?