Question

You've borrowed $20,000 on margin to buy shares in Disney, which is now selling at $40 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $35 per share. 2. Will you receive a margin call? (Hint: Use the statement "Your account starts at the initial margin requirement of 50%" to figure out how many Disney shares you purchased.) How far can the price of Disney shares fall before you receive a margin call? a. b.

Answer 1

You have borrowed $20,000 for initial margin requirement o f 50% and you would have also put in an initial margin of another $20,000 (i.e. your own equity) The total amount $40,000 Number of shares of Disney bought S40,000/S40 per share 1,000 shares The market value of Disney shares (When the share price falls to S35 per share) 1,000 S35 -S35,000 Now equity Total Assets - Total Liabilities S35,000 S20,000 $15 000. The percentage margin-Equity / Total Assets $15,000/$35,000-42.9% As percentage margin exceeds the required maintenance margin, you will not receive a margin call

Part b: Letus assume that Pis the share price at which the maintenance margin call wil!be received So market value of shares 1,000 SP S1,000P Then equity Total Assets Total Liabilities S1,000P - $20,000. You will receive a margin call when the ratio of equity to the value of 1000 shares falls below 35% That is (S1 ,000P-$20,000) / $ 1,000P < 35% S1,000P - S20,000 s 350P S650 P s$20,000. P S30.77 So you will receive a margin call when share price is S30.77 or below