Foundations of Finance

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1._x000D_
Essex Unlimited PLC purchased shares of Microsoft stock currently selling at £50/sh for £50,000. The company also borrowed £20,000 from a broker and financed the rests of the purchase on its own. The interest rate on the loan was 7% p.a. A year later, due to the bearish condition of the market, the price of the stock takes a tumble and sells at £25/sh._x000D_
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a) Calculate the initial margin for Essex Unlimited PLC._x000D_
b) Calculate the final margin for Essex Unlimited PLC. If the maintenance margin is 30%, does the company receive a margin call? Why or why not?_x000D_
c) Calculate the return on investment (ROI) for Essex Unlimited PLC. Did the company make the right decision on the purchase? Why or why not?_x000D_
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2._x000D_
Essex Unlimited PLC decides to short sell 1000 shares of Apple stock currently selling at £120/sh. The initial margin is set to 50%. In the following year, the price of the stock rises to £150/sh due to the healthy economy as well as anticipation of new products that have been announced by the company. The stock also pays an annual dividend of £3/sh._x000D_
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a) Calculate Essex Unlimited PLC€™s final margin. If the maintenance margin is 30%, does the company receive a margin call? Why or why not?_x000D_
b) Calculate the return on investment for Essex Unlimited PLC. Did the company make the right decision on the short sale? Why or why not?_x000D_
c) What would be its ROI if the price of the shares went up by 10%? What would be the price if the shares went down by 10%?_x000D_
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3._x000D_
Refer to questions 1 and 2 above for the following:_x000D_
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a) What should the share price of the Microsoft stock be selling at in the final year so that Essex Unlimited PLC can cover the maintenance margin of 30% in order to avoid a margin call?_x000D_
b) What should the share price of the Apple stock be selling at in the final year so that Essex Unlimited PLC can cover the required maintenance margin of 30% in order to avoid a margin call?_x000D_
c) Based on what you have known so far, what can you conclude about buying on margin vs. short selling?_x000D_
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