USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Kathy Smith has a margin account with a balance of $60,000. Initial margin requirements are 80 percent, and Jackson Industries is currently selling at $40 per share.
-Refer to Exhibit 3.3. If the maintenance margin is 25 percent, to what price can Jackson Industries fall before Kathy receives a margin call?
A) $21.75
B) $23.00
C) $10.67
D) $15.93
E) $12.67

Question

Quizplus · Accepted Answer

To find the price at which Kathy receives a margin call, we need to find the amount of equity in the account at the maintenance margin level.
At the initial margin level of 80%, the amount of equity in the account is 20% of $60,000 = $12,000.
At the maintenance margin level of 25%, the required equity in the account is 25% of the total value of the holdings.
So, the total value of the holdings can be calculated as:
$12,000 / 0.25 = $48,000
The number of shares that Kathy can hold with $48,000 is:
$48,000 / $40 = 1,200 shares
Therefore, Kathy will receive a margin call when the value of her holdings falls below $48,000. At this point, the number of shares she can hold is:
$48,000 / 0.25 = $12,000
The price per share is therefore:
$12,000 / 1,200 = $10.67
Hence, the correct option is C.