Old Economy Traders opened an account to short-sell 1,550 shares of Internet Dreams at $74 per share. The initial margin requirement was 52%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $74 to $81, and the stock has paid a dividend of $4 per share.

Required:

a. What is the remaining margin in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

c. What is the rate of return on the investment?

Question

Business

Barrett Chambers

19 August, 21:46

Old Economy Traders opened an account to short-sell 1,550 shares of Internet Dreams at $74 per share. The initial margin requirement was 52%. (The margin account pays no interest.) A year later, the price of Internet Dreams has risen from $74 to $81, and the stock has paid a dividend of $4 per share.

Required:

a. What is the remaining margin in the account?

b. If the maintenance margin requirement is 30%, will Old Economy receive a margin call?

c. What is the rate of return on the investment?

+1

Answers (1)

Know the Answer?

Willie Snow · Answer 1

A. 37%

B. No because the margin is above the requirement at 37%.

C.-118%

Explanation:

Old Economy Traders

a.

1,550 shares*$74 per share = 114,700

margin requirement is 52% so equity = 59,644

1 year later price increase to 81

$1550 shares*$81 per share = 125,550

Dividend = $4*1550 = 6,200

Margin = 114,700/131750 = 37%

b.

No because the margin is above the requirement at 37%.

c.

Price of 1550 stock year 1 at 81$/share = 125,550

114,700 - 125,500 = - 10800

Rate of return = (-10800 - 59,644) / 59,644 = - 118%