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nd sell the stock for $27 a share. What is your rate of
return on Francesca Industries?
4.
You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly
high of $56. Your broker tells you that your margin requirement is 45 percent and that the
commission on the purchase is $155. While you are short the stock, Charlotte pays a $2.50
per share dividend. At the end of one year, you buy 100 shares of Charlotte at $45 to close
out your position and are charged a commission of $145 and 8 percent interest on the
money borrowed. What is your rate of return on the investment?
120 Part 1:
The Investment Background
Property
of
Cengage
Learning

 
5.
You own 200 shares of Shamrock Enterprises that you bought at $25 a share. The stock is
now selling for $45 a share.
a. You put in a stop loss order at $40. Discuss your reasoning for this action.
b. If the stock eventually declines in price to $30 a share, what would be your rate of re
turn with and without the stop loss order?
6.
Two years ago, you bought 300 shares of Kayleigh Milk Co. for $30 a share with a margin
of 60 percent. Currently, the Kayleigh stock is selling for $45 a share. Assuming no divi
dends and ignoring commissions, compute (a) the annualized rate of return on this invest
ment if you had paid cash, and (b) your rate of return with the margin purchase.
7.
The stock of the Madison Travel Co. is selling for $28 a share. You put in a limit buy or
der at $24 for one month. During the month the stock price declines to $20, then jumps
to $36. Ignoring commissions, what would have been your rate of return on this invest
ment? What would be your rate of return if you had put in a market order? What if
your limit order was at $18?
Use the Thomson One
Business School Edition Online Database to answer the following
questions.
1.
On which stock markets are the following firms traded: Abbott Labs, Apple Computer,
ExxonMobil, Intel, Johnson & Johnson, Microsoft?
2.
Suppose you purchased Microsoft stock on January 15, 2011, and sold it two months later
on March 15, 2011. What would your percentage price return be? What would the per
centage return be if you had used 75 percent margin? 50 percent margin?
3.
Redo exercise 2 but this time assume you purchased Microsoft on March 15, 2011,
and sold it two months later on May 15, 2011. What would the annualized returns be if you
bought the stock with cash? If you used 75 percent margin? 50 percent margin?
Chapter 4:
Organization and Functioning of Securities Markets
121
Property
of
Cengage
Learnin

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