Equity Investments

Posts: 3
Joined: Mon Apr 02, 2012 7:59 pm

Equity Investments

Hi,
I am a bit confused with this question which was given in schweser:

An investor bought a stock on margin. The margin requirement was 60%, the current price of the stock is \$80, and the investor paid \$50 for the stock 1 year ago. If margin interest is 5%, how much equity did the investor have in the investment at year-end?

A) 67.7%
B) 73.8%
C) 60.6%

Can someone help me with this question?

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Equity Investments

Hi Chirag,

To find out how much of your position is equity, you need to use the formula:
Equity/Total Position Value
Now, one year ago, we paid 60%*\$50 = \$30, and the remaining \$20 was borrowed.
The interest paid for borrowing \$20, is 5%*\$20 = \$1
Thus, the numerator = \$80-\$20-\$1 = \$59
The denominator = \$80
% Equity in the position = 59/80 = 73.75%

Hope this helps

Posts: 3
Joined: Mon Apr 02, 2012 7:59 pm

Re: Equity Investments

but it is written that investor bought stock on margin and paid \$50 1 year ago.
So shouldn't it be like this:
\$50 = 60% * Stock price

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Equity Investments

Hi Chirag,

You made a pretty good point. The question should have said that "we bought it at \$50", not "paid 50". When you read "paid \$50 in cash", then you can be absolutely certain that they mean \$50 = 60% * Stock price..