Question

a. Assume that you would like to buy 100 shares of a stock that is currently priced at $ 70. The initial margin is 75% and maintenance margin is 35%.

How much would the total purchase amount to in dollars.

How much in total cash of your own do you need in dollars in this example?

How much will you be able to borrow in dollars in this example?

b. Show your total dollar amount of investment and your results in table below.

Price = 70
Total value of investment =	Loan=                                     Equity =
Total Assets =	Liabilities + Equity=

c. Calculate the margin for this case.

d. If the market value of the stock falls to $ 60 (from a that was 70) after one year, provide a new balance sheet

Price=60
Total value of investment	Loan =                         Equity =
Total Assets =	Liabilities + Equity=

e. Calculate the margin for this case.

f. If the market value of the stock further falls to $ 40 (from a that was 70) after one year, provide a new balance sheet

Price=40
Total value of investment	Loan =                         Equity =
Total Assets =	Liabilities + Equity=

g. Calculate the margin for this case.

Answer 1

Total purchase amount to in dollars.= $70*100=$7000

cash of your own do you need in dollars in this example = 0.75*7000=$5250

able to borrow in dollars in this example=0.25*7000=$1750

b)

Price = $70
Total value of investment =	Loan=	$ 1,750.00
$                                     7,000.00
	Equity =	$ 5,250.00
Total Assets =7000	Liabilities + Equity=
		$ 7,000.00

c) Margin is 35%, hence the value of equity shall be always atleast 35%.

	70
Money per share borrowed=	17.5
Max peer share that can be borrowed	45.5
Margin price	$    26.92

d)

Price = $70
Total value of investment =	Loan=	$ 1,750.00
$                                     6,000.00
	Equity =	$ 4,250.00
$                                     6,000.00	Liabilities + Equity=
		$ 6,000.00