Question

QUESTION 7: You bought 250 shares of McWeber Inc. stock on margin. Price paid was $75 per share. The initial margin is 60%. The maintenance margin is 25%. A. What is the initial equity per share? (2 points) B. What is the loan amount per share? (2 points) C. How low can the price fall before there is a margin call? (2 points) D. Assume the price falls to $36. What is the amount of the margin call? (3 points) E. Assume the price did not fall. Instead the price increased to $92 and you sold the stock. During the nine month period in which you held the stock you received dividends of $.82 each quarter. Assume also that the annual interest rate charged on the loan amount is 8%. What is the holding period return on your invested capital (i.e. your equity investment) for the 9-month holding period? (5 points)

^{**ONLY NEEDING THE ANSWER TO PART E!!!!!!!!!!!!!!!!}

Answer 1

(a) Number of Shares Bought = 250, Price Paid per Share = $ 75 , Total Worth of Shares bought = 75 x 250 = $ 18750, Initial Margin = 60 % and Maintenance Margin = 25%

Initial Margin Value = Initial Equity Value = 0.6 x 18750 = $ 11250

Equity Value per Share = 11250 / 250 = $ 45

(b) Loan Value = 18750 - 11250 = $ 7500

Loan Value per Share = 7500 / 250 = $ 30

(c) Maintenance Margin = 25 %

Let the required share price be $ k

Therefore, 250k - 7500 = 0.25 x 250 x k

7500 = 187.5 k

k = $ 40

(d) Equity Value at Maintenance Margin Level = 250 x 40 - 7500 = $ 2500

Equity Value if Stock Price is $ 36 = 250 x 36 - 7500 = $ 1500

Required Margin Topup = 2500 - 1500 = $ 1000

(e) Sale Price = $ 92, Buy Price = $ 75, Dividend = $ 0.82 per share per quarter, Margin interest Rate = 8% and Margin Loan per Share = $ 30

Therefore, Holding Period Return = [0.82 x 3 + (92-40) - 30 - 30 x 0.08] / 45 = 0.5515 or 55.15 %