Assume you purchased 100 shares of common stock at $50 per share using 2,500 of your own money.The initial margin requirement is 50%.If the minimum margin is 30%,at what prince would you get a margin call?

Question

Quizplus · Accepted Answer

The total cost of the stock purchase is 100 shares x $50 per share = $5,000.

The initial margin requirement is 50%, therefore, the amount borrowed from the broker is 50% x $5,000 = $2,500.

The minimum margin is 30%, therefore, the equity in the account must not fall below 30% of the total value of the account.

Let x be the price at which the margin call occurs.

We know that the equity in the account is (100 shares x $ x per share) - $2,500.

We also know that the equity must be at least 30% of the total value of the account:

(100 shares x $ x per share) - $2,500 ≥ 0.3(100 shares x $ x per share)

Simplifying this expression:

$ x per share ≥ $35.71

Therefore, the margin call would occur when the stock price falls to $35.71 per share or below. The answer is C.

Assume You Purchased 100 Shares of Common Stock at $50