Question

Part A:

You buy 500 shares of stock at a price of $94 and an initial margin of 50 percent. If the maintenance margin is 40 percent, at what price will you receive a margin call? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Margin Call Price:

PART B

You purchase 650 shares of 2nd Chance Co. stock on margin at a price of $45. Your broker requires you to deposit $17,500.

a. Suppose you sell the stock at a price of $50. What is your return? What would your return have been had you purchased the stock without margin? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

With Margin: %

Without Margin: %

b. What is your return if the stock price is $44 when you sell the stock? What would your return have been had you purchased the stock without margin? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

With Margin: %

Without Margin: %

Answer 1

Part A:

You buy 500 shares of stock at a price of $94 and an initial margin of 50 percent. If the maintenance margin is 40 percent, at what price will you receive a margin call? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Margin call Price = (Amount Borrowed / Shares Purchased) / (1 - Maintenance Margin)

Margin call Price = (94 * 500 * 50% / 500) / (1 - 40%)

Margin call Price = 47 / (1 - 40%)

Margin call Price = $78.33

PART B

You purchase 650 shares of 2nd Chance Co. stock on margin at a price of $45. Your broker requires you to deposit $17,500.

a. Suppose you sell the stock at a price of $50. What is your return? What would your return have been had you purchased the stock without margin? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Return With Margin= (Sale Value - Purchase Value) / Margin Amount

Return With Margin= (650 * 50 - 650 * 45) / 17500

Return With Margin= 18.57%

Return Without Margin: (Sale Price - Purchase Price) / Purchase Price

Return Without Margin: (50 - 45) / 45

Return Without Margin: 11.11%

b. What is your return if the stock price is $44 when you sell the stock? What would your return have been had you purchased the stock without margin? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Return With Margin= (Sale Value - Purchase Value) / Margin Amount

Return With Margin= (650 * 44 - 650 * 45) / 17500

Return With Margin= -3.71%

Return Without Margin: (Sale Price - Purchase Price) / Purchase Price

Return Without Margin: (44 - 45) / 45

Return Without Margin: -2.22%

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