Question

Use the following information to answer questions 16 and 17: You sell short 100 shares of Doggie Treats Inc. that are currently selling at $40 per share. You post the 50% margin required on the short sale. Your broker requires a 30% maintenance margin.

16) If the price falls to $30 short position in stocks and equity amounts are _______and_______, respectively.

a. $3,000, $4,000

b. $2,000, $4,000

c. $3,000, $3,000

d. $4,000, $2,000

17) You will get a margin call if the stock price raise to ________. Group of answer choices

a. $54.85

b. $51.85

c. $46.15

d. $49.75

Answer 1

Ans 16: a) $ 3,000, $ 4,000

Explanatory Solution 16:

Given:

Number of Short Sell Shares = 100

Selling Price Per Share or Share Price Before Stock Falls = $ 40

Margin Required on the Short Sale = 50 %

Broker’s Maintenance Margin = 30 %

Share Price After Stock Falls = $ 30

To Calculate:

Equity Amounts

Formula:

Equity Amounts = Total Number of Shares × Stock Price Per Share

Process: Calculations

1. Equity Amount After Stock Falls:

Here:

Total Number of Shares = 100 & Stock Price Per Share = $ 30

So, Equity Amount = 100 × $ 30 = $ 3,000

Equity Amount After Stock Falls = $ 3,000

2. Equity Amount Before Stock Falls:

Here:

Total Number of Shares = 100 & Stock Price Per Share = $ 40

So, Equity Amount = 100 × $ 40 = $ 4,000

Equity Amount Before Stock Falls = $ 4,000

Results:

Equity Amount After Stock Falls = $ 3,000

Equity Amount Before Stock Falls = $ 4,000

So, our Answer Option is a) $ 3,000, $ 4,000

Ans 16: a) $ 3,000, $ 4,000

Ans 17: c) $ 46.15

Explanatory Solution: 17

Given:

Number of Short Sell Shares = 100

Selling Price Per Share = $ 40

Margin Required on the Short Sale = 50 %

Broker’s Maintenance Margin = 30 %

To Calculate:

The Stock Price at which we will get a Margin Call.

Formula:

BMM = ((TVS + MVS) – NS × P)) / NS × P

Where:

BMM = Broker’s Maintenance Cost

TVS = Total Value of Shares

MVS = Marginal Value of Shares

NS = Number of Shares

P = Stock Price at which we get Margin Call

Process: Calculations

Step: 1 Calculation of Total Value of Shares (TVS):

Total Value of Shares (TVS) = Number of Shares × Selling Price

Total Value of Shares = 100 Shares × $ 40 = $ 4,000

Total Value of Shares (TVS) = $ 4,000

Step: 2 Calculation of Marginal Value of Shares (MVS):

Marginal Value of Shares (MVS) = Total Value of Shares × % of Margin on Short Sale

Marginal Value of Shares = $ 4,000 × 50 % = $ 2,000

Marginal Value of Shares (MVS) = $ 2,000

Step: 3 Calculation of The Stock Price “P” at which we will get a Margin Call.

Broker’s Maintenance Margin = (Total Value of Shares + Marginal Value of Shares) – Number of shares × P / Number of shares × P

BMM = ((TVS + MVS) – NS × P) / NS × P

On putting the values in the formula, we get,

0.3 = (($ 4,000 + $ 2,000) – 100 P) / 100 P

0.3 = ($ 6,000 – 100 P) / 100 P

30 P = $ 6,000 – 100 P

130 P = $ 6,000

P = $ 6,000 / 130

P= $ 46.15

The Stock Price “P” at which we will get a Margin Call = $ 46.15

So, our Answer Option is c) $ 46.15

Ans 17: c) $ 46.15