Question

2. An investor purchases 500 shares of ABC stock on margin. The current price of ABC stock is $75 per share, the initial margin requirement is 60% and the maintenance margin requirement is 35%.

A)   What is the dollar amount of the loan the investor receives from her broker for this margin purchase?

B)    How far can the stock price fall before the investor gets a margin call?

Answer 1

A). Total Investment Value = Share Price * Shares Outstanding

= $75 * 500 = $37,500

Loan Amount = Total Investment Value * (1 - Initial Margin%)

= $37,500 * (1 - 0.60) = $15,000

B). Assume price be P

Value of 500 shares is 500P

Equity = Value of Shares - Borrowed Amount = 500P - $15,000

Required margin = Equity / The value of the shares

0.35 = [500P - $15,000] / 500P

0.35 * 500P = 500P - $15,000

175P = 500P - $15,000

500P - 175P = $15,000

325P = $15,000

P = $15,000 / 325 = $46.15

You will receive a margin call when the stock price falls below $45.15.