Buying on Margin Practice (show all work)

1. Jacob opens a margin account and deposits $4,000 of cash.

a.What is the value of Jacob's buying power? $

b.What is the value of Jacob's equity?

2. Jacob buys 400 shares of a stock at $20 per share.

a. What is the value of the stocks Jacob bought?

b.How much cash does he have in his account?

c. Has the value of his equity changed?

3. Suppose the value of Jacob's stock rises from $20 a share to $30 a share.

a. What is the market value of the Jacob's stocks?

b. What is the value of Jacob's equity?

c. If Jacob sold all his stocks and closed the account, how much money would he have?

d. How much did Jacob gain from his original deposit of $4,000? How much was this gain as a percentage of his original deposit?

4. Suppose instead of rising to $30 a share, Jacob's stock falls to $15 a share.

a.What is the market value of Jacob's stocks?

b.What is the value of Jacob's equity?

c. Jacob's broker has a maintenance margin requirement of 30%, yet in no case can equity fall below the minimum of $2,000. Do you think his broker would send him a margin call? Explain.

d. What is the percentage decline in the stock's price? What is the percentage decline in Jacob's equity?

5. Suppose instead of falling to $15 a share, Jacob's stock sinks to only $10.

a. What is the market value of Jacob's stocks? 400 shares x $10 = $4,000.

b.What is the value of Jacob's equity?

c. Jacob's broker has a maintenance margin requirement of 30%, yet in no case can equity fall below the minimum of $2,000. Do you think his broker would send him a margin call? Explain.