Use the following information to answer the next three questions. QUESTION 1 You
ID: 2732186 • Letter: U
Question
Use the following information to answer the next three questions.
QUESTION 1
You feel Delta Industries' stock will decline, so you short 400 shares at an initial margin of 60 percent on 12/1. Your broker charges you an annual rate of 6% for borrowed funds. Delta trades at $37/share the day you created your short position. If the maintenance margin is 30 percent, at what share price will you receive a margin call?
45.54
84.57
39.85
74
QUESTION 2
What is your actual margin if the stock trades at $35/share on 12/2?
.6486
.4137
.6914
.2814
QUESTION 3
You closed your margin account four months after opening it. What is your return on invested capital if Delta trades for $42 when you close the account?
-.2386
-.5586
-.6638
-.6755
45.54
84.57
39.85
74
Explanation / Answer
(1)Share price that would triger a margin call:-
The proceeds of sale=$14800
To deposit in account=Short position(1+Intial margin)=14800(1+0.6)=$23680
Margin call value=Deposit in account/(1+Manintance margin)=$23680/(1+0.30)=$18215
Price per share change triggering margin call=$18215/400=$45.54
(2).Share price that would triger a margin call for $35/share on 12/2:-
The proceeds of sale=$14000
To deposit in account=Short position(1+Intial margin)=14000(1+0.6)=$22400
Margin call value=Deposit in account/(1+Manintance margin)=$22400(1+0.30)=$17231
Price per share change triggering margin call=$17231/400=$43.07
(2).Actual margin if the stock trades at $35/share on 12/2:-
Value of share=35*4000=$14000
Equity=Margin-Equity=23680-14000=9680
Actual margin=9680/14000=0.6914
(3).Delta trades for $42 when you close the account.Return on Invested capital:-
Value of current shares=$42*400=$16800
Equity=Margin-Equity=23680-16800=$6880
Actual Margin=6880/16800=0.4095
Interest on Maintaince margin=[(16800/1.3)-6880]*6%*4/12=$119
Return on capital=(Stock sale price-stock purchase price)/ Intial margin requirement=(14800-119-16800)/8880
=-0.2386