11) Tony purchased 100 shares of T-Rex stock for $43 a share On the same day, Sa

Question

11) Tony purchased 100 shares of T-Rex stock for $43 a share On the same day, Sam also purchased 100 shares of T-Rex stock for $43 a share. Tony paid cash for his purchase while Sam used margin. The initial margin requirement on this stock is 60 percent while the maintenance margin is 40 percent. Both Tony and Sam sold their shares after eight months at a price of $40 a share. The stock pays no dividends. Tony had a holding period percentage return of percent as compared to Sam's percent return. Ignore margin interest and trading costs A) -4.19; -6.98 B)-41 9:-11 .63 C) -6.98; -4.19 D) -6.98; -11.63 E) -11.63;-7.56 12) Mary purchased 100 shares of Best Foods stock on margin at a price of $49 a share. The initial margin requirement is 65 percent and the maintenance margin is 30 percent. What is the lowest the stock price can go before Mary receives a margin call? A) $17.00 B) $24.50 C) $28.00 D) $30.00 E) $33.00

Explanation / Answer

ANSWER = C) -6.98; - 4.19

Holding period return = [ Stock Price at end (P1) - Stock price at beginning (P0) ] / Stock price at beginning (P0)

Tony HPR = [$ 40 - $ 43] / $43 * 100

= - 6.98 %

Sam paid Initial margin = 60%

Maintenance margin = 40%

P* = {[100 * $43 * (1 - .60)]/100}/(1 - .40)

= 43

Sam HPR = [ $40 - $ 43] / $ 43 * 0.60 * 100

= -4.19 %

12) ANSWER = B) $24.50

P* = {[100 * $49 * (1 - .65)]/100}/(1 - .30)

= $24.50

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