(6 Points) Assume you purchased 100 shares of Zoomer Corp\'s stock on margin at

Question

(6 Points) Assume you purchased 100 shares of Zoomer Corp's stock on margin at the beginning 430 3. of the year for $50 per share. You use $3,000 of your own funds and borrow $2,000 through your broker. Maintenance margin requirement is 30%. a) At what price would you receive a margin call (ignore interest)? 00o b) Annual interest cost is 5% on the margin account loan. investment if Zoomer's stock is $56.50 per share after one year? What is your rate of return on your 3000 Gso -10o 350 c) What is the margin percent in your account at the end of the year? 550 56so arain

Explanation / Answer

a. total value of investment = 5000; equity/toal investment ratio = 3000/5000 = 3/

Let price fall to p for margin call to happen; equity/toal investment ratio =0.3

.3 = (100p -2000)/(100p

30p = 100p - 2000

70p = 2000

p = 28.57

b. interest on 2000 loan = 0.05*2000 = 100

value of investment at stock price of 56.5 = 56.5*100 = 5650

rate of return = (5650 - original investment - interest)/ own investment = (5650-5000-100)/3000 = 550/3000 = 18.33%

c.margin % = 3550/5650 = 62.83%

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