Question

The price of Facebook stock is currently at $56.51 and you decide to buy 100 shares on margin. You borrow $1,500 from your broker and finance the remainder of the purchase with your own cash. I need help with #2 & #3

1.What is your margin (as a decimal value)? (56.51*100-1,500)/(56.51*100)=0.735

2.If the price rises to $60, and the interest you have to pay on the broker's loan is 4%, what is the net return (as a decimal value)?

3.If the broker's maintenance margin is 40%, what is the minimum value that Facebook stock price can take before you are issued a margin call?

Answer 1

2. You have bought 100 shares at 56.51 each. Total purchase cost = 56.51*100=5651$; 1500 is financed at 4% whereas the remainder is paid by self (5651-1500=4151$)

Financing cost = 4%*1500=60$

Profit/net return = ((60-56.51)*100)-60 = 289$

Net return % = 289/4151=0.0696 = 6.96%

3.

Let x be the total notional loss of the security value due to price drop.

So the equity drops to 4151-x

Margin call happens when equity drops to less than maintenance margin %

(4151-x)/(5651-x)=39.99%

x=3176.16

Total security value = 5651-3176.16=2474.84

Share price = 2474.84/100=24.75 at which margin call will be received