This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
ScanSolve AI Answer
Okay, James, let's tackle Question 8. This question builds on the previous one, so we'll use the information from Question 7. From Question 7: Total cost of stock = \20,000 Amount financed by Mr. Thomas Demo (equity) = \12,000 Amount borrowed from broker (loan) = \20,000 - \12,000 = \8,000 The problem states "the value of the stock has fallen to 70 per share". To determine the number of shares, we need the initial price per share, which was not explicitly given in Question 7. We will make a reasonable assumption for the initial price per share. Assumption: The initial price of the stock was \100 per share. Step 1: Calculate the number of shares purchased. Using our assumption for the initial price per share: Number of Shares = Initial Total InvestmentInitial Price per Share = (\20,000)/(\100/share) = 200 shares Step 2: Calculate the new total value of the investment. The value of the stock has fallen to \70 per share. New Total Value = Number of Shares × New Price per Share = 200 shares × \70/share = \14,000 Step 3: Calculate the portfolio's loss or gain. Loss/Gain = New Total Value - Initial Total Investment = \14,000 - \20,000 = -\6,000 The portfolio has incurred a loss of \6,000. Step 4: Sketch the balance sheet. The balance sheet reflects the current financial position. Assets: The current market value of the stock. Liabilities: The amount borrowed from the broker. This loan amount remains constant unless repaid. Equity: The investor's current stake (Assets - Liabilities). |l|l| Assets & Liabilities \& Equity \\ Stock (200 shares @ \70/share) \14,000 & Loan from Broker \8,000 \\ & Investor's Equity \6,000 \\ Total Assets \14,000 & Total Liabilities \& Equity \14,000 \\ Step 5: Distribute the gain or loss. The loss of \6,000 is borne entirely by the investor's equity. Initial equity = \12,000 Loss = \6,000 New equity = Initial equity - Loss = \12,000 - \6,000 = \6,000. This matches the equity shown in the balance sheet. The broker's loan amount remains unchanged. The portfolio has a loss of \6,000. The loss is distributed by reducing the investor's equity from \12,000 to \$6,000. Last free one today — make it count tomorrow, or type /upgrade for unlimited.