An investor opens a margin account with a discount broker. The initial margin requirement is 50%. The maintenance margin is 30%. The investor intends to buy 1000 shares of XYZ at $40. An interest rate on the margin loan is 4% per year. The stock does not pay any dividends.
a) Assume in one year the stock’s price did not fall but increased to $45, and the investor holds the shares. What is the buying power of his or her margin account?
b) Assuming the situation described in part (f), how much can the investor withdraw in cash?
c) Assuming the investor decides to short sale the stock (instead of buying it in the beginning) and receives $40 per share. If he/she deposits $30,000 (as stated in part (b), how far can the stock price raise before the investor receives a margin call?
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