Sun Lee purchased 1,100 shares of Franklin Metals stock for $16.80 a share. The stock was purchased with an initial margin of 65 percent. The maintenance margin is 30 percent. The stock is currently selling for $17.60 a share. What is the minimum dollar amount of equity that he must have in this stock today to avoid a margin call?

Question

Quizplus · Accepted Answer

Step 1: Calculate the initial investment
Initial investment = 1,100 shares × $16.80 per share = $18,480

Step 2: Calculate the initial margin
Initial margin = 65% × $18,480 = $12,012

Step 3: Calculate the current value of the investment
Current value of investment = 1,100 shares × $17.60 per share = $19,360

Step 4: Calculate the current equity
Current equity = current value of investment - loan = $19,360 - $12,012 = $7,348

Step 5: Calculate the minimum equity required to avoid a margin call
Minimum equity required = maintenance margin × current value of investment
Minimum equity required = 30% × $19,360 = $5,808

Therefore, the minimum dollar amount of equity that he must have in this stock today to avoid a margin call is $5,808. The correct answer is option D.

Sun Lee Purchased 1,100 Shares of Franklin Metals Stock for $16.80