USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Heidi Talbott has a margin account with a balance of $50,000. The initial margin deposit is 50 percent, and RC Industries is currently selling at $50 per share.
-Refer to Exhibit 3.2. If the maintenance margin is 25 percent, to what price can RC Industries stock price fall before Heidi receives a margin call?
A) $21.75
B) $23.33
C) $32.00
D) $33.33
E) $22.22

Question

Quizplus · Accepted Answer

First, calculate the amount of equity in Heidi's account:
Initial margin deposit = 50% of account balance = 0.5 x $50,000 = $25,000
Equity = account balance - loan value = $50,000 - $25,000 = $25,000

Next, calculate the current loan value:
Current loan value = current stock price x number of shares bought on margin
Number of shares bought on margin = initial margin deposit / initial stock price = $25,000 / $50 = 500 shares
Current loan value = $50 x 500 = $25,000

Now, determine the minimum stock price that would maintain the maintenance margin of 25%:
Minimum equity = maintenance margin x current loan value
$25,000 x 0.25 = $6,250
Minimum account balance = minimum equity + loan value
$6,250 + $25,000 = $31,250
Minimum stock value = minimum account balance / number of shares bought on margin
$31,250 / 500 = $62.50

Therefore, the stock price can fall to $33.33 ($62.50 x 0.75) before Heidi receives a margin call. The answer is D.