Question

1. Margin Ratios:
   1. Long:
      1. Your starting position is as follows:

Assets:                                     Liabilities & Equity

1,000 shrs @ $10                    Loan from Broker $4,000

= $10,000                                Equity $6,000

                                   

                                    What is your starting “percentage margin”?

2. You believe the stock is going to go up to $15 per share. If it does that, what would be your:
   1. Dollar return on the $6,000 equity you started out with?
   2. The percentage return on the $6,000 equity you started with?

3. Bad news – you were wrong. The stock drops to $5 per share. Draw up your new balance sheet:

Assets:                                     Liabilities & Equity

1,000 shrs @                           Loan from Broker       

                                    =                                                Equity:            

            What is your percentage margin now?

4. You receive the dreaded margin call. Your broker says you must return your percentage margin to 50%. Your choices are 1) add more cash, or 2) close out some of your position by selling shares:

1. If you do that by adding cash, how much would you need to deposit?

Fill out the resulting balance sheet:

Assets:                                     Liabilities & Equity

1,000 shrs @ 5                        Loan from Broker:      

                                    =                                                 Equity:            

           

2. If you do that by closing some of your position, how many shares would you need to sell, (assuming you could sell as many as you wanted @ $5 per share?)

Fill out the resulting balance sheet:

Assets:                                     Liabilities & Equity

          shrs @5                         Loan from Broker       

                                    =                                                 Equity:            

Answer 1

u percentage margin= value of equity x100 value of securities = $6000 x100 = 60% $10,000

1 Il stock price goes up to $15 fer share Dollar return = Sales Peuce + Dividend (if any) - Purchase price = 9000 (600x15) + 0 - (600xio) 6ooo E $3000 6000 Percentage return = 3000x100 - 50% (if we take only gam) of I This one is süght though. and 9000 x100 = 150% (if we take whole value seuvities.) lote: Proportionate have been taken, ire, the securities bought with value of tquity. 6000

i 4000 stock price drops by $5 pee share New balance sheet Assets $ liabilities & Equity Loan from broker (margin exhausted against) tquüty boso Other comprehensualtoos Income (loss of shares 5ooo looo share @55 6000 (5000) not realized) $5000 $ 5000 Percentage margin = $1000 (value & Equity) a x 100 $ 5000 (value Ruites)

(iv) Margin required - 50% is all more cash Total value of thares = 1000 shares sot of value - $ 5000 x 50/ Lass: Value of tguity 5 - $5000 $2.500 $lovo abundy having $ 1500 Amount to be deposited Resulting Balance sheet liabilities & equity san from broker $2500 Assets looo shares @5 = $5000 $2500 G1000 + 1500) $ 5000 $ 5000 2) As 50% margin is to be made and Investment are to be sold, so loss will be realized. The remaining Equity will be $1000 as 50't margin So total securities can be held of $2000. Therefore. Balance sheet Assets 1ooo Loan from broker You shares liability & Equity looo 2000 Equity 2000 @s 2000