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Galen buys $12,000 of Pyramid Corporation stock. Unfortunately, a major newspaper reveals the very next day that the company is being investigated for accounting fraud, and the stock price falls by 90%. What is the percentage increase now required for Galen to get back to $12,000 of value?

Answer :

To determine the percentage increase required for Galen to get back to his initial investment of $12,000 after the stock price falls by 90%, we can follow these steps:

  1. Initial Situation: Galen buys the stock for $12,000.

  2. Loss Calculation: The stock price falls by 90% due to the negative news.

    The amount lost can be calculated as:

    [tex]\text{Amount Lost} = 0.90 \times 12,000 = 10,800[/tex]

  3. Current Stock Value: With the loss calculated above, the current value of Galen's investment becomes:

    [tex]\text{Current Value} = 12,000 - 10,800 = 1,200[/tex]

  4. Required Increase Calculation: To find out how much the stock needs to increase to return to the original value of $12,000, we need to calculate the percentage increase based on the current value of $1,200:

    The difference required to break even is:

    [tex]\text{Difference Required} = 12,000 - 1,200 = 10,800[/tex]

    The percentage increase required is then calculated as:

    [tex]\text{Percentage Increase} = \left(\frac{10,800}{1,200}\right) \times 100\%[/tex]

    Simplifying the fraction:

    [tex]\text{Percentage Increase} = \left(9\right) \times 100\% = 900\%[/tex]

Therefore, the stock price must increase by 900% from its current value of $1,200 to return to the original investment value of $12,000.

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