question archive a) Pendekar purchased 300 shares of JEBAT Co's stock at RM55 per share using the prevailing minimum initial margin requirement of 50%
a) Pendekar purchased 300 shares of JEBAT Co's stock at RM55 per share using the prevailing minimum initial margin requirement of 50%
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a) Pendekar purchased 300 shares of JEBAT Co's stock at RM55 per share using the prevailing minimum initial margin requirement of 50%. She held the stock for exactly four months and sold it without any brokerage costs at the end of that period. During the four month holding period, the stock paid RM1.50 per share in cash dividends. JEBAT Co was charged 9% annual interest on the margin loan. The minimum maintenance margin was 25%. i. At RM45 share price calculate the actual margin percentage, and indicate whether Pendekar's margin account would have excess equity, would be restricted or would be subject to a margin call. (3 marks) ii. At RM50 sale price at the end of the four month holding period to calculate Pendekar's rate of return on the JEBAT Co's stock transaction. (4 marks)
b. You sell short 200 shares of Doggie Treats Inc. which are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends)
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a.
i)
Number of shares = 300
Price per share = 55
Total value = 300 x 55 = 16,500
Margin amount = 50%
Equity = Value x margin = 16,500 x 0.5 = 8,250
Debt = 8,250
When the share price is 45,
Value of the account = 45 x 300 = 13,500
Margin = (Value of the account - debt) / Value of the account = (13,500 - 8250) / 13,500 = 0.3889 or 38.89%
Since the margin is below the minimum inital margin requirement and above the minimum maintenance margin, the account would be restricted.
ii)
Annual interest rate = 9%
Holding period = 4 months or 4/
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12 years
Loan amount = 8,250
Interest + Principal due after 4 months = 8,250 x (1 + 0.09)4/12 = 8490.43
Dividends recieved = 1.5 x 300 = 450
Proceeds from sale = 300 x 50 = 15,000
Net proceeds = 15,000 + 450 - 8490.43 = 6,959.57
Initial investment = 8,250
Rate of return = (6,959.57 - 8,250) / 8,250 = -0.1564 or -15.64%
b)
Number of shares = 200
Price per share = $25
Value of Shares shorted = 25 x 200 = $5,000
Margin = 50%
Equity = Margin x Value of shares shorted = 0.5 x 5,000 = $2,500
Value of Account = 5,000 + 2,500 = $7,500
Maintenance margin = 30%
Margin Call Account Value = Account Value / (1 + Maintenance Margin) = 7,500 + (1 + 0.3) = $5,769.23
Margin call share price = 5,769.23 / 200 = $28.85
