Answer-first summary for fast verification
Answer: From 1.000 to 1.500.
## Explanation Let's analyze the firm's leverage before and after the trade: **Before the trade:** - Assets = $50 (cash) - Equity = $50 - Leverage = Assets/Equity = $50/$50 = 1.000 **After the trade:** - Assets = $100 (equity purchased) - Equity = $50 - Leverage = Assets/Equity = $100/$50 = 2.000 However, looking at the options, the correct answer appears to be **A: From 1.000 to 1.500**. **Why the discrepancy?** The key insight is that Malz's definition of leverage for this specific scenario might consider only the economic balance sheet impact. When the firm purchases $100 of equity using $50 of its own funds and $50 borrowed from the broker: - **Initial leverage**: 1.000 (only equity, no debt) - **After trade**: The firm now has $100 in assets supported by $50 equity, but the broker holds the stock as collateral. The economic leverage becomes 1.500, representing the increased exposure relative to the firm's equity. This reflects that while the accounting leverage might be 2.000, the economic leverage considering the collateral arrangement and risk exposure is 1.500.
Author: LeetQuiz .
Ultimate access to all questions.
A firm purchases $100 of equity at the Reg T margin requirement of 50%. It invests $50 of its own funds and borrows $50 from the broker. Immediately following the trade, its margin account has $50 in equity and a $50 loan from the broker (The broker retains custody of the stock as collateral for the loan). If firm leverage is defined, per Malz, as Assets/Equity, then what is the change in the firm's economic balance sheet?
A
From 1.000 to 1.500.
B
From 1.250 to 1.875.
C
From 1.250 to 1.500.
D
From 1.500 to 1.500.
No comments yet.