Suppose that Facebook is selling at $75 per share. You are bullish on Facebook stock, and want to buy 1000 shares on margin. The initial margin is 50%. You can borrow from your broker at an interest rate of 6%.
(a) How much do you invest using your own money? How much do you need to borrow from your broker?
(b) Assume that Facebook pays a year-end dividend of $2.5 per share. What will be your holding period return if the stock ex-dividend price of Facebook (i) goes up by 10% (ii) doesn’t change (iii) goes down by 10% during the next year?
(c) How low can stock price fall before you get a margin call, if the maintenance margin is 25%?
You are bearish on Facebook stock, and want to sell short 1000 shares at current price. The initial margin is 50%. (a) Assume that you earn no interest on the funds in your margin account. Facebook currently does not pay dividend. What will be your holding period return if the stock price of Facebook (i) goes up by 10% (ii) doesn’t change (iii) goes down by 10% during the next year?
(b) How high can stock price rise before you get a margin call, if the maintenance margin is 25%?