On Monday, January 3rd the closing price of Meta Platforms Incorporated (FB) was $338.54 and the one-month T-bill rate on that day was close to zero and thus can be safely ignored for this question. The closing price on Thursday, February 3rd was $237.76. FB does currently not pay any dividends. The borrowing rate on your margin account is 6.5% and any short sale proceeds in the margin account do not earn interest. The initial margin requirement is 50% and the maintenance margin requirement is 30%.

(a) Buying on Margin You are strong believer that the future of the internet is going to be virtual and “Meta” and thus you decide to buy 5, 000 shares of FB on margin on January 3rd. You have to evaluate your leveraged position on February 3rd.

(i) What is the largest amount that you can borrow on January 3rd?

(ii) What is the annualized return on this one-month purchase on margin?

(iii) Provide a snapshot of your brokerage account on February 3rd. Do you receive a margin call? (iv) Suppose FB paid a large dividend of $200 per share during the day of February 3rd. Provide a snapshot of your brokerage account on February 3rd. Do you receive a margin call in this case?

Answer rating: 100% (QA)

To calculate the largest amount that can be borrowed on January 3rd we need to determine the initial margin requirement and the total cost of purchasi... View the full answer