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

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