USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Jackie has a margin account with a balance of $150,000. The initial margin deposit is 60 percent and Turtle Industries is currently selling at $50 per share.
-Refer to Exhibit 3.1. If the maintenance margin is 25 percent, to what price can Turtle Industries fall before Jackie receives a margin call?
A) $14.56
B) $23.17
C) $32.42
D) $26.67
E) $25.52

Question

Quizplus · Accepted Answer

To determine the price at which Jackie would receive a margin call, we first calculate the amount of Turtle Industries shares Jackie can buy with the initial margin deposit. With a balance of $150,000 and an initial margin requirement of 60%, Jackie can use $150,000 * 0.60 = $90,000 to buy shares. At $50 per share, Jackie can buy $90,000 / $50 = 1800 shares. The maintenance margin is 25%, meaning the equity in Jackie's account must not fall below 25% of the market value of the shares. The formula to find the price at which the margin call occurs is: Equity = Number of Shares * Price at Margin Call - Amount Borrowed. The equity needed to meet the maintenance margin is 25% of the market value (Number of Shares * Price at Margin Call). So, 0.25 = (1800 * Price at Margin Call - $60,000) / (1800 * Price at Margin Call). Solving for Price at Margin Call gives us approximately $26.67.