You purchased 100 shares of common stock on margin at $40 per share.Assume the initial margin is 50%, and the stock pays no dividend.What would the maintenance margin be if a margin call is made at a stock price of $25? Ignore interest on margin.
A)0.33
B)0.55
C)0.20
D)0.23

Question

Quizplus · Accepted Answer

The initial value of the stock is: 100 shares x $40 per share = $4,000.
The initial margin is 50%, so the investor would have paid $2,000 and borrowed $2,000.
If the stock price falls to $25 per share, the value of the stock is: 100 shares x $25 per share = $2,500.
The equity in the account would be: $2,500 - $2,000 = $500.
To find the maintenance margin, we use the formula:
Maintenance margin = (borrowed amount - current value of stock) / current value of stock
Maintenance margin = ($2,000 - $2,500) / $2,500 = -0.2 or 20%
Since the maintenance margin is negative, this means that a margin call has been made and the investor must either deposit more funds or sell some of the stock to increase the equity in the account to the required level. Therefore, the answer is C.

You Purchased 100 Shares of Common Stock on Margin at $40