Question

Lauren has a margin account and deposits $40,000. Assume the prevailing margin requirement is 50 percent, commissions are ignored, and the Gentry Wine Corporation is selling at $50 per share. How many shares can Lauren purchase using the maximum allowable margin? Round your answer down to the nearest whole number. shares.

What is Lauren’s profit (loss) if the price of Gentry’s stock rises to $55? Use a minus sign to enter loss, if any. Round your answer to the nearest dollar. Use the rounded value of the number of shares from part a. $ falls to $45? Use a minus sign to enter loss, if any. Round your answer to the nearest dollar. Use the rounded value of the number of shares from part a. $

If the maintenance margin is 40 percent, to what price can Gentry Wine fall before Lauren will receive a margin call? Round your answer to the nearest cent. Use the rounded value of the number of shares from part a. $

Answer 1

Given margin deposit =$40000

Margin requirement=50%

Hence purchases can be made =$40000/50%=$80000

Price of wine corporation is $50/shares

So number of shares that can be purchased=80000/50=1600 shares

If the price rises to 55, since lauren had purchased shares at 50 gain=(55-50)*1600=$8000

If the price falls to 45,loss=(45-50)*1600=-$8000

Maintenance margin is 40%

Hence maintain margin in amount will be = total open purchases * maintenance margin%=80000*40%=32000

Margin deposited by lauren =40000 hence maintenance margin will be triggered at

32000-40000= - 8000

Since the number of shars purchased is 1600 the fall in price shall be by= - 8000/1600 =-$5/share

Hence the price at which margin will be called =50-5=$45