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Department of Management Sciences, National University of Modern Languages

This document contains solutions to two investment problems. For problem 5, the document explains that placing a stop loss order at $40 for shares of Shamrock Enterprises originally purchased at $25 makes sense to lock in profits as the share price has risen to $45. The rate of return with the stop loss order would be 60% while without it would be 20% if the share price later fell to $30. For problem 6, the annualized rate of return is calculated to be 50% if 300 shares of Kayleigh Milk Co purchased for $30 two years ago are now worth $45 per share. With the original purchase made using 60% margin, the rate of return is calculated to be 83

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299 views

Department of Management Sciences, National University of Modern Languages

This document contains solutions to two investment problems. For problem 5, the document explains that placing a stop loss order at $40 for shares of Shamrock Enterprises originally purchased at $25 makes sense to lock in profits as the share price has risen to $45. The rate of return with the stop loss order would be 60% while without it would be 20% if the share price later fell to $30. For problem 6, the annualized rate of return is calculated to be 50% if 300 shares of Kayleigh Milk Co purchased for $30 two years ago are now worth $45 per share. With the original purchase made using 60% margin, the rate of return is calculated to be 83

Uploaded by

Sheiry
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Department of Management Sciences, National University of Modern

Languages

Assignment
Submitted by:
Shahraz Mushadi
Roll NO: 31466
Subject: IPM
Submitted to: Mam Sabah
Class: MBA (3.5)4th Evening
Date: 02-06-2020
Chapter# 04

Problem# 05
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 return with and without the stop loss
order?
Requirement (a)
I am satisfied with the profit resulting from the sale of the 200 shares at $40.

Requirement (b)
With the stop loss:
= ($40 - $25)/$25
= 60%
Without the stop loss:
= ($30 - $25)/$25
= 20%

Problem# 06
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 dividends and ignoring commissions, compute (a) the annualized
rate of return on this investment if you had paid cash, and (b) your rate of
return with the margin purchase.
Requirement (a)
Assuming that you pay cash for the stock:
( $ 45 ×300 )−($ 30× 300)
=
( $ 30 ×300)
13500−9000
= 9000
=50%

Requirement (b)
Assuming that you used the maximum leverage in buying the stock,
the leverage factor for a 60 percent margin requirement is = 1/margin requirement
= 1/.60
= 1.67
Thus, the rate of return on the stock if it is later sold at $45 a share = 50% x 1.67
= 83.33%.

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