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pyramiding as it applies to this investment situation. b. What is the
present margin position (in percent) of Ravi’s account? c.
Ravi
buys the 1,000 shares of RS through his margin account (bear in mind
that this is a $20,000 transaction). 1. What will the margin position
of the account be after the RS transaction if Ravi follows the
prevailing initial 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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Case Problem 3.1 The Perezes’ Good Fortune Angel and Marie Perez
own a small pool hall located in southern New Jersey. They enjoy
running the business, which they have owned for nearly three years.
Angel, a retired professional pool shooter, saved for nearly 10 years to
buy this business, which he and his wife own free and clear. The
income from the pool hall is adequate to allow Angel, Marie, and