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Question

John Smith purchased 500 shares of Horizon industries stock at the price of $60 per share using prevailing minimum initial margin requirement of 50%. John held the stock exactly six months. Assume there are no brokerage costs at the end of the period. During the six-month holding period, the stock paid $2 per share in cash dividends. He was charged 8% annual interest on the margin loan. The minimum maintenance margin was 25%.

Calculate the initial value of the transaction, the debit balance, and the equity position of John’s position.

For each of the following share prices, calculate the actual margin percentage and indicate whether John’s margin account would have excess equity, would be restricted, or would be subject to a margin call.

$55

$70

$35

Calculate the dollar amount of dividends received and interest paid on the margin loan during the six-month period.

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