Warren purchased 500 shares of Telsa Motors (TSLA) stock trading at $40 per share. Assume that...

Warren purchased 500 shares of Telsa Motors (TSLA) stock trading at $40 per share. Assume that Warren’s account has an initial margin requirement of 60%. Moreover, suppose Warren’s broker requires a maintenance margin of 30%.

Required

Calculate the price at which Warren will receive a margin call.

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Expert Solution

Calculation of Price of Margin Call for Warren:

From the information given in the above question, we have:

Current stock price(P0) = $40/share

Initial margin = 60%

Maintenance margin = 30%

Formula: Price for Margin Call = P0 * [ (1 - initial margin) / (1 - maintenance margin)]

therefore, Price for Margin Call = $40 * [(1 - 0.60) / (1 - 0.30)]

or, = $40 * (0.40 / 0.70) = $22.86/share

Hence, Warren will get margin call when the price of Tesla Motors will become $22.86/share.

jeff jeffy answered 2 years ago

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