Question

Bob Orleans invested $3,000 and borrowed $3,000 to purchase shares in Verizon Communications. At the time of his investment, Verizon was selling for $16 a share.

a. If Bob paid a commission of $40, how many shares could he buy if he used only his own money and did not use margin?

b. If Bob paid a commission of $80, how many shares could he buy if he used his $3,000 and borrowed $3,000 on margin to buy Verizon stock?

c. Assume Bob did use margin to buy his Verizon stock. Also, assume he paid another $40 to sell his stock and sold the stock for $25 a share. How much profit did he make on his Verizon stock investment?

Answer 1

a. If Bob paid a commission of $40, he could buy 185 shares. b. If Bob paid a commission of $80 and used margin, he could buy 370 shares. c. Bob made a profit of $3,100 on his Verizon stock investment.

Step-by-step explanation:

To answer these questions, let's break down each scenario:

a. If Bob paid a commission of $40, he would have $3,000 - $40 = $2,960 to invest. With this amount, he can buy $2,960 / $16 = 185 shares of Verizon stock.

b. If Bob paid a commission of $80 and used his $3,000 and borrowed $3,000 on margin, he would have a total of $3,000 + $3,000 - $80 = $5,920 to invest. With this amount, he can buy $5,920 / $16 = 370 shares of Verizon stock.

c. If Bob used margin to buy his Verizon stock, paid another $40 to sell the stock, and sold the stock for $25 a share, we need to calculate the profit. He initially bought 370 shares, so his profit would be ($25 - $16) * 370 - $40 = $3,100.