Consider the following data: YBM's stock price is $110.The initial margin is 50 percent and the maintenance margin is 25 percent.If you buy 150 shares,borrowing 50 percent from the broker,at what stock price will you start to receive a margin call? (Hint: use the formula Margin= (Market value of assets - Loan)/ Market value of assets. )

Question

Quizplus · Accepted Answer

Firstly, let's calculate how much money we need to buy the 150 shares:

150 shares x $110 per share = $16,500

We are borrowing 50% from the broker, so we only need to use $8,250 of our own money.

Now we can calculate the initial margin:

initial margin = (market value of assets - loan) / market value of assets
0.5 = (16500 - 8250) / 16500

Next, let's calculate the maintenance margin:

maintenance margin = (market value of assets - loan) / market value of assets
0.25 = (market value of assets - 8250) / market value of assets

We can rearrange this to solve for the market value of assets:

market value of assets = loan / (1 - maintenance margin)
market value of assets = 8250 / (1 - 0.25)
market value of assets = $11,000

Now we can calculate at what stock price we will receive a margin call:

loan = $8,250
margin call price = (loan / 0.75) / 150 = $73.33

Therefore, we will receive a margin call if the stock price falls to $73.33 or lower. The correct answer is D.

Consider the Following Data: YBM's Stock Price Is $110