Question

# 1) You sell short 200 shares of Doggie Treats Inc. that are currently selling at \$25...

1) You sell short 200 shares of Doggie Treats Inc. that are currently selling at \$25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

A.
\$32.25
B.
\$31.50
C.
\$28.85
D.
\$35.71

2) You purchased 250 shares of common stock on margin for \$25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at \$32 per share. Ignore interest on margin.
A.
43%
B.
39%
C.
35%

D.
28%

3) You purchased 200 shares of ABC common stock on margin at \$50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

A.
\$30.77
B.
\$28.95
C.
\$26.55
D.
\$35.71

4)
You sell short 300 shares of Microsoft that are currently selling at \$30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at \$27? (Ignore any dividends.)

A.
20%
B.
6.67%
C.
15%
D.
10%

1.

Stock price = \$25

Margin = 50%.

Margin value = \$25 × 50%

= \$12.50

Maintanance margin = 30%

Stock price at which you will get margin call = (Stock Price + Margin) / (1 + Maintanance margin)

= (\$25 + \$12.50) / (1 + 30%)

= \$37.50 / 1.30

= \$28.85.

If Stock price go up from \$28.85 then investor will get margin call.

2.

Number of share purchase = 250

Purchase price = \$25

Initial Margin = 65%.

Initial Value of investment per share = \$25 × 65%

= \$16.25

Initial Value of investment per share is \$16.25.

Borrowed fund = \$25 - \$16.25

= \$8.75.

If stock price become = \$32

Amount remained after repayment of borrowed fund = \$32 - \$8.75

= \$23.25.

Amount remained after repayment of borrowed fund is \$23.25.

Return on investment = (\$23.25 - \$16.25) / \$16.25

= \$7 / \$16.25

= 43.08%

Return on investment is 43.08%.

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