In: Finance
6. Sara Sanders purchased 30 shares of Apple stock at $189.29 per share using the prevailing minimum initial margin requirement of 51%. She held the stock for exactly 5 months and sold it without any brokerage costs at the end of that period. During the 5-month holding period, the stock paid $1.37 per share in cash dividends. Sara was charged 4.8% annual interest on the margin loan. The minimum maintenance margin was 25%.
a. Calculate the initial value of the transaction, the debit balance, and the equity position on Sara's transaction.
b. For each of the following share prices, calculate the actual margin percentage, and indicate whether Sara's margin account would have excess equity, would berestricted, or would be subject to a margin call:
(1) $174.54, (2) $207.01, and (3) $122.27.
c. Calculate the dollar amount of (1) dividends received and (2) interest paid on the margin loan during the 5-month holding period.
d. Use each of the following sale prices at the end of the 5-month holding period to calculate Sara's annualized rate of return on the Apple stock transaction:
(1) $185.09, (2) $194.52, and (3) $206.27.
Given that,
· Sara Sanders purchased 30 shares of Apple stock at $189.29 per share
· Initial Margin requirement = 51%
· Holding Period = 5 months
· Cash Dividends received = $1.37 per share
· Annual Interest on Margin Loan = 4.8%
· Minimum Maintenance Margin = 25%
a) Initial Value of the Transaction = 30*$189.29 = $5678.70
Debit Balance = Loan Amount
Let it be L
Equity Position on transaction = Initial Value-Debit Balance
= $5678.70 - $2782.56 = $2896.14
b) 1) Actual Margin % if share price is $174. 54
As actual margin % is greater than minimum maintenance margin % but less than Initial margin %, margin account would be restricted.
2) Actual Margin % if share price is $207.01
As actual margin % is greater than Initial Margin %, margin account is said to have excess equity.
3) Actual Margin % if share price is $122.27
As actual margin % is lower than minimum maintenance margin %, there would be a Margin Call.
c) 1) Total amount of Dividends received = $1.37*30 = $41.1
2) Interest paid on Margin Loan = 2782.56*(4.8%)*(5/12) = $55.65
d) Annualized rate of return if share price is $185.09