a. Today (9/10), you own 100 shares of GE and you want to buy MFST stock. You de
ID: 2384132 • Letter: A
Question
a. Today (9/10), you own 100 shares of GE and you want to buy MFST stock. You decide to sell all of your shares to fund your purchase. GE is currently trading at $25 and MFST is trading at $50. If you were to buy on margin, with a 50% margin (the maximum allowed), what would your balance sheet look like?
b. Suppose your broker set a minimum margin requirement of 30%. How far could the price of MFST fall tomorrow before a margin call?
c. Now suppose that the loan has a 5% interest rate per day, how far could the price of MFST fall tomorrow before you receive a margin call?
date 9/10 9/11 9/12 price msft 50 45 20 price ge 25 30 20Explanation / Answer
a. Today (9/10), you own 100 shares of GE and you want to buy MFST stock. You decide to sell all of your shares to fund your purchase. GE is currently trading at $25 and MFST is trading at $50. If you were to buy on margin, with a 50% margin (the maximum allowed), what would your balance sheet look like?
Available Fund = 25*100 = 2500
No of Share you could buy of MFST = (2500/50%)/50 = 100 Share
Your balance sheet look like :
Capital = 2500
Amount Borrowed = 100*50*50% = 2500
Asset = 5000
b. Suppose your broker set a minimum margin requirement of 30%. How far could the price of MFST fall tomorrow before a margin call?
The price of MFST fall tomorrow before a margin call = 50*(1-50%)/(1-30%)
The price of MFST fall tomorrow before a margin call = $ 35.71
c. Now suppose that the loan has a 5% interest rate per day, how far could the price of MFST fall tomorrow before you receive a margin call?
The price of MFST fall tomorrow before a margin call = 50*(1-50%)/(1-30%-5%)
The price of MFST fall tomorrow before a margin call = $ 38.46
Balance Sheet Capital 2500 Current Assest Liability Investment in Shares 5000 Amount borrowed - Margin Money 2500 Total 5000 Total 5000Related Questions
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