Equity Investments

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

Equity Investments

Postby chirag.gada » Sat Apr 14, 2012 7:31 pm

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

Postby content.pristine » Mon Apr 16, 2012 4:29 pm

Hi Chirag,

The Question asks how much of your position is equity, not how much profit you made.
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 8-)

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

Re: Equity Investments

Postby chirag.gada » Wed May 02, 2012 7:29 pm

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

Postby content.pristine » Wed May 02, 2012 8:34 pm

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..

8-)


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