CHAPTER 2 TUTORIALS
1) Suppose you want to buy 10000 shares of American Airlines at a price of $ 30 per share. You put
up to $200,000 and borrow the rest. What does your account balance sheet look like? What is
your margin?
Assets Amount Liability and account Amount
equity
10,000 Shares of AAL $300,000 Margin Loan $100,000
Account equity $200,000
Total $300,000 $300,000
For the margin divide the Accounts equity by the total cost:
Margin = 200,000 / 300,000 = 66.67%
2) Suppose that in the previous problem you shorted 10,000 shares instead of buying. The initial
margin is 60%. What does the balance sheet look like following the short?
60% of total $300,000 is $180,000
Assets Amount Liability and account Amount
equity
Proceeds from sale $300,000 Margin Loan $300,000
Initial margin deposit $180,000 Account equity $180,000
Total $480,000 $480,000
3) You purchased 500 shares of stock at a price of $56 per share on 50 percent margin. If the
maintenance margin is 30%, what is the critical stock price?
Price = Amount borrowed / number of shares
1 – Maintenance margin
= 14000 / 500
1 - 0.30
= $40
4) Dell corporation stock sells for $17 per share, and you have decided to purchase as many shares
as you possibly can. You have $31,000 available to invest. What is the maximum number of
shares you can buy if the initial margin is 60 percent?
With cash account you can buy 1823 shares
Maximum investment = $31,000/.60 = $51,667
Number of shares = $51,667/$17 per share = 3,039.22 (or 3,039) shares
5) You have $22,000 and decided to invest on margin. If the initial margin requirement is 55
percent, what is the maximum dollar purchase you can make?
Maximum dollar purchase = $22,000 / 0.55 = $40,000
6) You decided to buy 1200 shares of a stock at a price of $34 and an initial margin of 55 percent.
What is the maximum percentage decline in the stock before you will receive a margin call if the
maintenance margin is 35 percent?
Amount borrowed = (1,200 × $34)(1 – .55) = $18,360
Margin call price = ($18,360/1,200)/(1 –.35) = $23.54
Stock returns = (Pt+1 – Pt) / Pt
Stock price decline = ($23.54 – $34)/$34 = –.3077, or –30.77%
7) Suppose you purchase 500 shares of stock at $48 per share with an initial cash investment of
$8,000. If your broker requires a 30 percent maintenance margin, at what price you will be
subject to a margin call? If you want to keep your position open despite the stock price plunge,
what alternatives do you have?
Total purchase = 500 shares × $48 = $24,000
Margin loan = $24,000 – 8,000 = $16,000
Margin call price = ($16,000/500)/ [1 – .30] = $45.71
To meet a margin call, you can deposit additional cash into your trading account, liquidate shares
until your margin requirement is met, or deposit additional marketable securities against your
account as collateral.
8) Suppose you buy a stock at a price of $57 per share. Five months later you sell it for $ 61. You
also received a dividend of $0.60 per share. What is your annualized return on this investment?
Holding period return = ($61 – 57 + .60)/$57 = .0807, or 8.07%
EAR = (1 + .0807)12/5 – 1 = .2047, or 20.47%
9) You have just opened a margin account with $20,000 at your local brokerage firm. You instruct
your broker to purchase 500 shares of Landon golf stock, which currently sells at $ 60 per share.
What is your initial margin? Construct the equity account balance sheet for the position.
500 shares × $60 per share = $30,000
Initial margin = $20,000/$30,000 = .6667, or 66.67%
Assets Liabilities and account equity
500 shares $30,000 Margin loan $10,000
Account equity 20,000
Total $30,000 Total $30,000
10) Looking at problem 9, suppose the call money rate is 5 percent and your broker charges you a
spread of 1.25 percent over this rate. You hold this stock for six months and sell at a price of $
65 per share. The company paid a dividend of $ 0.25 per share the day before you sold your
stock. What is the total dollar return from this investment? What is the effective annual rate of
return?
Initial purchase = 500 × $60 = $30,000
Amount borrowed = $30,000 – 20,000 = $10,000
Interest on loan = $10,000(1 + .0625)1/2 – $10,000 = $307.76
Dividends received = 500($.25) = $125.00
Proceeds from stock sale = 500($65) = $32,500
Dollar return = $32,500 + 125 – 10,000 – 20,000 – 307.76 = $2,317.24
Rate of return = $2,317.24/$20,000 = .1159, or 11.59% per six months
Effective annual return = (1 + .1159)12/6 – 1 = .2451, or 24.51%
