Question

Sara Sanders purchased 30 shares of Apple stock at $190.82 per share using the prevailing minimum initial margin requirement of 58%. She held the stock for exactly 6 months and sold it without any brokerage costs at the end of that period. During the 6​-month holding​ period, the stock paid $1.49 per share in cash dividends. Sara was charged 5.4% annual interest on the margin loan. The minimum maintenance margin was 25%.

a. Calculate the initial value of the​ transaction, the debit balance​, and the equity position on​ Sara's transaction.

b. For each of the following share​ prices, calculate the actual margin​ percentage, and indicate whether​ Sara's margin account would have excess​ equity, would be​ restricted, or would be subject to a margin​ call: ​(1) $175.67​, (2) $206.33​, and​ (3) $122.83.

c. Calculate the dollar amount of​ (1) dividends received and​ (2) interest paid on the margin loan during the 6​-month holding period.

d. Use each of the following sale prices at the end of the 6​-month holding period to calculate​ Sara's annualized rate of return on the Apple stock​ transaction: (1)$185.02​, ​(2) $194.59​, and​ (3) $206.96

Answer 1

a. Initial Value of transaction = No of shares* Price per share 30*190.82 $5724.6 Initial Value of transaction = $5724.6 Debit balance = Initial margin required 5724.6*.58 $3320.268 Debit balance = $3320.27 Equity positon of Sara Fund source Share value Owned fund $3320.268 Margin loan $2404.332 Total $5724.6

b. Share Initial requirement 30 30 Stock price change 30 30 Share price Share value Margin requirement Total margin requirement Excess margin/Margin call) $190.82 $5724.6 $1431.15 $7155.75 $175.67 $5270.1 $1317.525 $6587.625 $568.125 $206.33 $6189.9 $1547.475 $7737.375 ($581.625) $122.83 $3684.9 $921.225 $4606.125 $2549.625

c. Dividend received = Dividend per share*no of shares $1.49*30 $44.7 Dividend received = $44.7 Interest on margin loan= margin loan*rate*time $2404.332*.054*6/12 $64.916964 Interest on margin loan= $64.92 (rounded) d. Calculation of sara's Annualized return Sales price Cost Profit/(loss) Annual return $185.02 $190.82 $-5.80 -3.04% $194.59 $190.82 $3.77 1.98% $206.96 $190.82 $16.14 8.46%