Suppose you decide to short sell some GameStop shares. Their cur- rent price is $5, and you have $5000 available to you. Your broker tells you that you have an initial margin requirement of 50%, with maintenance margin 35%. i. How many shares can you shortsell? How much cash will there be in the margin account? ii. Suppose GameStop rises in value to $6 per share. What percent- age margin do you have now? iii. How high will GameStop have to rise before you will get a margin call?

Suppose you decide to short sell some GameStop shares. Their cur- rent price is $5, and you have $5000 available to you. Your broker tells you that you have an initial margin requirement of 50%, with maintenance margin 35%. i. How many shares can you shortsell? How much cash will there be in the margin account? ii. Suppose GameStop rises in value to $6 per share. What percent- age margin do you have now? iii. How high will GameStop have to rise before you will get a margin call?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 23P

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You are about to purchase OSTK, which is currently trading at $20 per share. You have $5,000 of your own to invest. You borrow an additional $5,000 from your broker and invest $10,000 in the stock. How far does the stock price have to fall for you to get a margin call if the maintenance margin requirement is 35%?
You think that the stock of Fleetwood Corp is likely to rise within the next six months from its current price ($19.00 bid and $20.00 ask), and you want to maximize the amount of profit from your investment. So, you will use a margin account to borrow on margin in order to buy as many shares as you can. Your initial margin requirement is 45%, and you have $90,000 of your own money to invest in the shares. The minimum (maintenance) margin is 30%, and Fleetwood does not pay dividends. (Ignore interest for this problem.) If you buy Fleetwood on margin with the maximum margin loan, what is the maximum number of shares you can buy? Suppose you bought the maximum number of shares of Fleetwood as in (1). Assume that immediately after your purchase, Fleetwood’s share price drops to $18.00 per share. Calculate your new margin. Will you receive a margin call? How far can the price drop before you will receive a margin call? If the stock price falls to $14.00, you calculate that you would…
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