You’ve borrowed $16,000 on margin to buy shares in Ixnay, which is now selling at $40...

You’ve borrowed $16,000 on margin to buy shares in Ixnay, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $38 per share.

a. Will you receive a margin call?

b. How low can the price of Ixnay shares fall before you receive a margin call? (Round your answer to 2 decimal places.)

Solutions

Expert Solution

a. Computation of Percentage rate of margin

Borrowed amount = 16000

Own Equity = 16000

Value of shares at $38 = Amount invested * new share price / purchase price

Value of shares at $38 = 32000 * 38 / 40

Value of shares at $38 = $30400

Percentage rate of margin = Equity amount / value of shares

Percentage rate of margin = 14400 / 30400

Percentage rate of margin = 47.37%

No, we won't receive the margin call as the percentage margin of 47.37% is higher than the maintenance margin of 35%

b. How low can the price of Ixnay shares fall before you receive a margin call?

(Shares Held * New Share Price - Borrowed Amount) / Shares Held * New Share Price] = 35%

(800 * New Share Price - 16000) / (800 * New Share Price] = 35%

(800 * New Share Price - 16000) = 280 * New Share price

520 * New Share price = 16000

New Share price = $30.77

Please comment if you face any difficulty and please dont forget to upvote

jeff jeffy answered 1 year ago

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