Question

5. Margin Calls (LO3, CFA4) You buy 500 shares of stock at a price of $38 and an initial margin of 60 percent. If the maintenance margin is 30 percent, at what price will you receive a margin call? 6. Margin Calls on Short Sales (L04, CFA5) You short sold 1,000 shares of stock at a price of S36 and an initial margin of 55 percent. If the maintenance margin is 35 percent, at what share price will you receive a margin call? What is your account equity at this stock price? 7. Taxes and Returns (LOI, CFA9) You purchased a stock at the end of the prior year at a price of $73. At the end of this year, the stock pays a dividend of $1.20 and you sell the stock for $78. What is your return for the year? Now suppose that dividends are taxed at 15 percent and long-term capital gains (over 11 months) are taxed at 30 percent. What is your after-tax return for the year? Calculating Margin (LO3, CFA4) Using the information in Problem l, construct your equity account balance sheet at the time of your purchase. What does your balance sheet look like if the share price rises to $24? What if it falls to S14 per share? What is your margin in both cases? Round the number of shares down to the nearest number of whole shares

Answer 1

Answer:

5	Amount borrowed = [500 shares * $38]-[500 shares *38*.60]
	19000-11400
	$    7,600.00
	Margin Call price = $7,600/500 shares]/[1-.30]
		15.2/.60
		$    25.33
	Hence margin call price = $25.33
6	Proceeds from short selling of shares = 1,000 Shares × $36 per share = $36,000
	Initial Deposit = Proceeds x Initial Margin = $36,000 [0.55] = $19,800
	Total Account value = $36,000 + 19,800 = $55,800
	Therefore, Margin Call Price
	= Total Account Value / [ Shares Short + ( Shares Short x Maintenance Margin) ]
	$55,800 / [1,000 Shares + (1,000 Shares x 0.35)]
	$55,800 / 1,350 Shares
	Margin Call	=$41.33
	Equity = Account Value - Market value of shorted security
	$55,800-$36,000
	$ 19,800.00
8	Equity = Account Value - Market value of shorted security
	Account Value = Proceeds from shares + Initial deposit
	Proceeds from shares = 500*38
	Initial deposit = 500*38*.60
	=11400
	Account Value = 19000+11400
	$ 30,400.00
	Equity = 30400-19000
	=$11,400
	If the share price rises to $24
	Proceeds from short selling of shares = 500 Shares × $24 per share = $12,000
	Initial Deposit = Proceeds x Initial Margin = $12,000 [0.55] = $6,600
	Total Account value = $12,000 + 6,600 = $18,600
	Therefore, Margin Call Price
	= Total Account Value / [ Shares Short + ( Shares Short x Maintenance Margin) ]
	$18600 / [500 Shares + (500 Shares x 0.30)]
	$18600 / 650 Shares
	Margin Call	=$28.62
	If the share price falls to $14
	Proceeds from short selling of shares = 500 Shares × $14 per share = $7,000
	Initial Deposit = Proceeds x Initial Margin = $7,000 [0.55] = $3,850
	Total Account value = $7,000 + 3,850 = $10,850
	Therefore, Margin Call Price
	= Total Account Value / [ Shares Short + ( Shares Short x Maintenance Margin) ]
	$10850 / [500 Shares + (500 Shares x 0.30)]
	$10850 / 650 Shares
	Margin Call	=$16.69