Question

Suppose that ZX Inc. is currently selling at $50 per share. You buy 200 shares, using $5,000 of your own money and borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 5%.

Continue to assume that a year has passed. How low can ZX Inc.’s price fall before you get a margin call?

Answer 1

Current price of ZX share=200*50=10,000

Borrowing= $5000

Equity= $5000

Margin call= reduced equity/(reduced equity+borrowing)

Let's assume reduced equity amount to be $x

Now,

5% = x/(x+5000)

Solve for x, x= $263.16

Lowest price of ZX share before a margin call= 263.16+5000= $5,263.16