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margin (50%) and uses $10,000 of his money to buy the
stock?
2.
What if he uses only $2,500 equity and obtains a
margin loan for the balance ($17,500)?
3.
How do you explain the fact that the stock can be
purchased with only 12.5% margin when the prevailing
initial margin requirement is 50%?
d.
Assume that Ravi buys 1,000 shares of RS stock at $20 per
share with a minimum cash investment of $2,500 and that the stock
does take off and its price rises to $40 per share in one year.
1.
What is the return on invested capital for this
transaction?
2.
What return would Ravi have earned if he had bought
the stock without margin—that is, if he had used all his own
money?
e.
What do you think of Ravi’s idea to pyramid? What are the
risks and rewards of this strategy?
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FIN 402 Week 1 Assignment Case Problem 3.1 The Perezes’
Good Fortune
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