Mary purchased 100 shares of Best Foods stock on margin at a price of $37 a share. The initial margin requirement is 60% and the maintenance margin is 35%. What is the lowest the stock price can go before Mary receives a margin call?

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Quizplus · Accepted Answer

The lowest price before a margin call can be calculated using the formula: $P = \frac{D}{N \times (1 - MM)}$, where $P$ is the price at which the margin call occurs, $D$ is the amount borrowed, $N$ is the number of shares, and $MM$ is the maintenance margin. Mary's initial investment is 60% of the total value, so she borrows 40% of the money. For 100 shares at $37 each, the total value is $3700, and she borrows $1480 (40% of $3700). The maintenance margin is 35%, so plugging into the formula gives $P = \frac{1480}{100 \times (1 - 0.35)} = \frac{1480}{65} = $22.77$.

Mary Purchased 100 Shares of Best Foods Stock on Margin