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Juliette and Jason are in their mid 40's and married with 4 teenage children. They have $50,000 in surplus funds which they would like to invest in company ABC as they believe this to be a solid company with healthy dividends. Although purchasing shares in only one company does not offer the diversification, and will increase the risk of the investment, Juliette and Jason are diversified in their superannuation funds and this keeps it simple for illustrative purposes. The problem is that Juliette has a much greater tolerance for risk than her husband. She is prepared to borrow 70% of the value of the total investment. Jason on the other hand is only prepared to borrow 50% of the value of the total investment.
Assumptions
Required:
Using Juliette's strategy of investing $50,000 of their own funds, and taking out a margin loan with a loan to value ratio of 70%:
1. What will be the total amount of the margin loan?
2. Using Juliette's strategy, how many ABC shares can they purchase using this strategy (ignoring brokerage)?
3. If, the very next day, the price of ABC shares drops 20% to $4 per share, what is the new LVR using Juliette's strategy?
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