Question

Doug buys Mayonnaise, Inc. stock for $112 using a margin account with a 50% initial margin and a 35% maintenance margin. Assuming the price of the stock drops to $56, how much would Doug need to pay to restore the equity in his account to the maintenance margin?

Answer 1

$56

Step-by-step explanation:

The amount Doug needs to pay to restore the equity in his account to the Maintenance margin (which is the smallest quantity of equity that an investor have to maintain in the margin financial account following when the purchase has been made) is calculated below

Initial margin = $112×50% = $56

Maintenance margin = $112×35% = $39.20

Drop in share price = $112-$56 = $56

Initial margin balance = $56-$56 = $0

Amount needed to pay = $56