Suppose you buy 700 shares of XYZ currently trading at $63 per share with a loan from your broker. Your initial margin requirement is 50%. The maintenance margin is 30%. Suppose the price suddenly (and instantaneously) jumps down to $42 per share, triggering a margin call. As a result of the margin call, you are required to get your margin back up to 50%, by selling off shares to pay down your margin loan (you could use cash, but you do not want to throw good money after bad). How many shares to you need to sell (using the proceeds to pay down your margin loan) to get your margin back up to 50%? Assume that you can sell shares at $42 per share and assume the interest rate on your margin loan is 0%. Ignore taxes and transaction costs. Important Hint: If you get a fractional number of shares as your answer, round up.

Suppose you buy 700 shares of XYZ currently trading at $63 per share with a loan from your broker. Your initial margin requirement is 50%. The maintenance margin is 30%. Suppose the price suddenly (and instantaneously) jumps down to $42 per share, triggering a margin call. As a result of the margin call, you are required to get your margin back up to 50%, by selling off shares to pay down your margin loan (you could use cash, but you do not want to throw good money after bad). How many shares to you need to sell (using the proceeds to pay down your margin loan) to get your margin back up to 50%? Assume that you can sell shares at $42 per share and assume the interest rate on your margin loan is 0%. Ignore taxes and transaction costs. Important Hint: If you get a fractional number of shares as your answer, round up.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 5P

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