11. Inside Traders opens a brokerage account and purchases 1,500 shares of Energ
ID: 2801709 • Letter: 1
Question
11. Inside Traders opens a brokerage account and purchases 1,500 shares of Energy Innovations at $370 per share. They borrow $300,000 to pay for the stock. The interest rate on the loan is 99%. If the maintenance margin requirement is 25%, how low can the stock price go in one year before a margin call would be made? 12. Great Bear Traders are bearish on the Energy Innovations stock. They short sell 10,000 shares at the $370 per share price. The stock will pay a $5 dividend this year. The initial margin requirement is 60%, while the maintenance margin on short sales is 35%. If the stock rallies, how high can it go in one year before a margin call is made?Explanation / Answer
11.
Total Value of purchase = $1,500 × 370
= $555,000
Total Value of purchase is $5550,000.
Value of borrowed fund = $300,000
Investor margin = 46%
Percentage of borrowed fund = 54%.
VAlue of debt after one year = $300,000 × (1 + 9%)
= $327,000
New Percentage of borrowed fund = 59%.
Percentage of equity = 41%.
Price at get margin call = ($370 × 41%) / (1 - 25%)
= $152 / 75%
= $202.67.
If stock price comes below $202.67 then investor will get magin call.
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