Question

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%

Answer 1

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%.