Question

# You purchased 3000 shares of Microsoft common stock on margin at \$80 per share. Assume the...

You purchased 3000 shares of Microsoft common stock on margin at \$80 per share. Assume the initial margin is 70%, and the maintenance margin is 30%. What will be your initial position? If the share price falls below to \$50 per share, what will be your new position and percentage of margin?

Invsetment costs = no. of shares purchased*purchase price per share = 3000*\$80 = \$240,000‬

the initial margin is 70% which means equity of the investor is 70% and 30% loan taken from broker.

loan amount = \$240,000*30% = \$72,000

equity value = \$240,000 - \$72,000 = \$168,000‬

percentage of margin = (current value of investment - loan amount)/current value of investment = (\$50*3000 - \$72,000)/(\$50*3000) = (\$150,000‬ - \$72,000)/\$150,000 = \$78,000/\$150,000 = 0.52 or 52‬%

current percentage of margin is 52% which is higher than  maintenance margin of 30%. so, investor will not receive any margin call.

new position of equity of investor in the investment = current value of investment - loan amount = \$150,000‬ - \$72,000 = \$78,000.

so, equity has reduced in the investment from \$168,000 to \$78,000 or by \$168,000 - \$78,000 = \$90,000‬.

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