Purchase using the maximum allowable margin


Problem:

John Locke has a margin account and deposits $50,000. assuming the prevailing margin requirement is 40 percent, commissions are ignored, and the Mix-Up Corporation is selling at $35 per share.

a. How many shares can Mr. Locke purchase using the maximum allowable margin?

b. What is Mr. Locke's profit or loss if the price of Mix-Up's stock:

i. Rises to $45?
ii. Falls to $25?

c. If the maintenance margin is 30 percent, to what price can Mix-Up Corporation's stock fall before Mr. Locke will receive a margin call?

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Finance Basics: Purchase using the maximum allowable margin
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