Question

You’ve borrowed $40,000 on margin to buy shares in Ixnay, which is now selling at $20 per share. Your account starts at the initial margin requirement of 50%. The maintenance margin is 35%. Two days later, the stock price falls to $15 per share.

1. will you a margin call
2. how low can the price of disney shares of before you receive a margin call.

Answer 1

1) yes, you will receive a margin call. You initially borrowed $40,000 and you contributed $40,000 or your own money to purchase 4,000 shares of Ixnay at $20 per share (total investment = $80,000). At $15 per share, the market value of the shares is $60,000 (= $15 x 4,000), and your equity is only $20,000. The percentage margin = $20,000 / $60,000 which is lower than the 35% maintenance margin.

2) The lowest stock price to avoid a margin call would equal:

[(4,000 x price) - $40,000] / 4,000P = 0.35

4,000P - $40,000 = 1,400P

2,600P = $40,000

P = $15.38

Since the price fell to $15, it is below the threshold.