1. A stock sells for $10 a share. you purchase 100 shares for $1000 and after a year, the prices rises to $17.50. What will be the percentage of return on your investment if you bought the stock on margin and the margin requirement was 25%, 50%, and 75%? ( ignore commissions, dividends and interest expense)
2. Repeat problem 1 to determine the percentage return on your investment but in this case suppose the price of stock falls to $7.50 per share.
3.What generalization can be inferred from the answers to problems 1 and 2?
4.Ms. Gandi has decided that the stock of SmallCap inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin so Ms Gandi must put up the entire value of the stock when it is sold short.
a)What is the percentage loss if the price of the stock rises to $8?
b)What is the percentage loss if the price of the stock rises to $10?
c)What is the percentage gain if the company goes bankrupt and is dissolved?
d)What are the maximum percentage gain the short seller can earn and the largest percentage loss the seller can sustain?
e)From the short sellers perspective, what are the best and worst case scenarios?