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FIN 540 chapter 3 problems




Question;FIN 540 chapter 3 problemsProblems;Margin purchase;1.;Assume you buy 100 shares of stock at $40 per share on margin (50;percent). If the price rises to $55 per share, what is your percentage gain on;the initial equity?Margin;purchase;2.;In problem 1, what would the percentage loss on the initial equity;be if the price had decreased to $28?Minimum;margin;3.;Assume you have a 25 percent minimum margin standard in problems 1;and 2. With a price decline to $28, will you be called upon to put up more;margin to meet the 25 percent rule? Disregard the $2,000 minimum margin balance;requirement.Minimum;margin;4.;Recompute the answer to problem 3 based on a stock decline to;$23.75.Selling;short;5.You sell 100 shares of Norton;Corporation short. The price of the stock is $60 per share. The margin requirement;is 50 percent.;a.How much is your;initial margin?;b.If stock goes down to;$42, what is your percentage gain or loss on the initial margin (equity)?;c.If stock goes up to;$67.50, what is your percentage gain or loss on the initial margin (equity)?;d.In partc, if the minimum margin standard is 30 percent;will you be required to put up more margin? (Do the additional necessary;calculations to answer this question.)Margin;purchase and Selling short;6.You are very optimistic about;the personal computer industry, so you buy 200 shares of Microtech Inc. at $45;per share. You are very pessimistic about the machine tool industry, so you;sell short 300 shares of King Tools Corporation at $55. Each transaction;requires a 50 percent margin balance.;a.What is the initial;equity in your account?;b.Assume the price of;each stock is as follows for the next three months (month-end).Commission;percentage;7.Lisa Loeb is considering;buying 100 shares of CMA Record Company. The price of the shares is $52. She;has checked around with different types of brokers and has been given the;following commission quotes for the trade: online broker, $7, discount broker;$45, full-service broker, $98.;a.Compute the percentage;commission for all three categories.;b.How many times larger;is the percentage commission of the full-service broker compared with the;online broker? Round two places to the right of the decimal point for this;answer.Computing;tax obligations;8.;Compute the tax obligation for the following using Table 3?1 on;page 52.;a.An individual with taxable income of $59,000.;b.A married couple with taxable income of $130,000.;c.What is the average tax rate in partb?Capital;gains tax;9.Gill Thomas is in the 35;percent tax bracket. Her long-term capital gains tax rate is 15 percent. She;makes $16,200 on a stock trade. Compute her tax obligation based on the;following holding periods;a.6 months.;b.14 months.;3-9.;Selling;short and capital gains;10.Al Rodriguez sells 500 shares;of Gold Mine Corp. short at $80 per share. The margin requirement is 50;percent. The stock falls to $62 over a three-month time period, and he closes;out his position.;a.How much is his initial;margin?;b.What is his percentage;gain or loss on his initial margin?;c.If he is in a 35;percent tax bracket for short-term capital gains and a 15 percent bracket for;long-term capital gains, what is his tax obligation?;d.If the stock went up to;$94 instead of down to $62, what would be his dollar loss?;e.Assuming this is his;only transaction for the year (2007), how large a tax deduction could he take;against other income?;Price-weighted;average;11.;There are three stocks in a price-weighted index;A $100;B 20;C 60;a.What is the average;value for the index?;b.Assume stock A goes;down by 25 percent and stock B goes up by 25 percent, and stock C remains the;same. What is the new average value for the index?;c.Explain why in partbthe average changed with two stocks moving up and down;by the same percentage amount.Computing;an index;12.;Assume the following five companies are used in computing an;index;Company;Shares Outstanding;Base Period January 1, 1984 Market;Price;Current Period December 31, 2007 Market;Price;A;6,000;$ 6;$12;B;2,000;5;18;C;10,000;8;40;D;1,000;20;10;E;4,000;15;32;a.If the index is price;weighted, what will be the value of the index on December 31, 2007? (Take the average price on;December 31, 2007, and divide by the average price on January 1, 1984, and;multiply by 100.);b.If the index is value;weighted, what will be the value of the index on December 31, 2007? (Take the total market value;on December 31, 2007, and divide by the total market value on January 1, 1984;and multiply by 100.);c.Explain why the answer;in partbis different from the;answer in parta.;Changing;index values in a value-weighted index;13.;Assume the following stocks make up avalue-weightedindex;Corporation;Shares Outstanding;Market Price;Reese;4,000;$35;Robinson;16,000;4;Snider;6,000;10;Hodges;40,000;20;a.Compute the total;market value and the weights assigned to each stock. Round to two places to the;right of the decimal point. (The weights may add up to slightly more than 100;percent due to rounding.);b.Assume the price of the;shares of the Snider Corporation go up by 50 percent, while those of the Hodges;Corporation go down by a mere 10 percent. The other two stocks remain constant.;What will be the newly established value for the index?;c.Explain why the index followed the pattern it did;in partb.Changing;index values in a value-weighted index;14.In problem 13, if the initial;price of the shares of the Snider Corporation double while those of the Hodges;Corporation go down by 7.5 percent, would the value of the index change? The;other two stocks remain constant. Do the necessary computations.


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