Question : Question
The Financial Advisor's Investment Case Investing
The Financial Advisor's Investment Case Investing an $7o for a 100 sha The Kelleher brothers, victor and Darin, could among brokers, you decide that use for not reasonable to are he more different. is assertive and tak- se or sale is a commercial banks ing risks, while Darin is reserved and is exceedingly purcha purposes. Currently, accounts. to an illustrative savings risk averse. Both have jobs that pay well and paying only 3 percent on you decide vide fringe benefits, including medical insurance and To give the presentation focus, pension plans. You are the executor for their grand- swer the following questions: rned by Darin father's estate and know that each brother will soon the percentage return ea stock for a inherit $85.000 from the estate. Neither has an im- What is the mediare need for the cash, which could be invested if he acquires 100 shares, holds ro meet some long-term financial year, and sells stock for S80? by Victor Once the funds have been received, y expect 2. What is the percentage return earned holds the Victor to acquire some exceedingly investment if he acquires 100 shares on margin, for $80? f he does immediately risky sells the stock squander the money). stock for a year, and What advantage does buying stock on margin You would be surprised, however, if Darin offer Victor? to do anything other than place the funds in a low- yielding savings account. Neither alternative makes 3. What would be the percentage returns if the sale prices had been $50 or $100? financial sense to you, so before the distribution of the funds you decide to offer financial suggestions 4. Must the two brothers leave the stock registered that would reduce Victor's risk exposure and in in street name? If not, what would be the advan crease Darin's potential return. tage of leaving the stock with the broker? Does Given the brothers' ages and financial condition, leaving the stock increase their risk exposure? you believe that equity investments are appropriate 5. What would be the impact on the brothers' re- Such investments may satisfy Victor's propensity to turns if the rate of interest charged by the broker take risks and increase Darin's potential return without increases to 10 percent? ively increasing his risk exposure (willingness to 6. If the maintenance margin requirement were assume risk). Currently, the stock of Choice Juicy Fruit 30 percent and the price of the stock declined is selling for $60 and pays an annual dividend of S1.50 to $50, what impact would that have on each a share. The company's line of low-to-no-sugar juice brother's position? At what price of the stock offers considerable potential. The margin requirement would they receive a margin call? set by the Federal Reserve is 60 percent, and broker- 7. Why would buying the stock be more advanta- age firms are charging 7 percent on funds used to geous to both brothers than the alternatives you purchase stock on margin. While commissions vary anticipate them to select?