1. Louisa short sold 700 shares of Celpa stock at $35 a share at an initial margin of 55 percent. The maintenance margin is 30 percent.
a. Construct a balance sheet depicting this transaction. Label each item such as Equity and so on.
b. What is your equity value if stock goes up to $40 per share? What is the new margin?
c. What is the highest price the stock can go before she receives a margin call?
2. i) Find the current stock value (P0) for a firm that is expected to have EXTRAORDINARY growth of 25% for 4 years, after which it will face more competition and slip into a CONSTANT-GROWTH RATE of 5%. Its required return is 14% and next year's dividend (Div1) is expected to be $5.00.
ii) Show numerically that investment horizon has no bearing on current stock price. For your illustration assume investment horizons of 3 versus 5 years and the following facts: The stock is correctly priced at $40.00, has a required return of 17%, a growth rate of 7%, and has just paid a $3.74 dividend.