Margin Call

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Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50% and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months and it closed today with a sharp decline bringing the closing price to $40 per share. Will Jensen receive a margin call?
A)
Yes, he does not meet the minimum maintenance margin requirement.
B)
No, he meets the minimum maintenance margin requirement.
C)
No, he meets the minimum initial margin requirement.
I know the margin call formula = P0 * (1-Initial/1-Maintenance)
Solving this I get = $60*(1-..5/1-.25) = $40.
The correct answer was C. I guessed A, was I wrong because he was not below the maintenance margin? Instead exactly equal? Just want to be sure I didn’t miss anything.
 
C is not correct; the initial margin has no bearing on whether or not a margin call is made.
Where did you get this question?
 
Hey C is the correct answer.
The stem says that the closing price is close to 40, so it’s not below 40. $40 is actually the margin call price.
[Ei + (Pt - P0)] / Pt = maintenance margin % <—- where: Ei = initial equity per share. and Pt= margin call price
[(0.5 * 60) + (Pt - 60) ] / Pt = 0.25
Pt= 40.
So if the price drops to, or below 40, then that will trigger a margin call. Here the price falls close to 40, but not to 40. Therefore C is correct.
 
Analyst0718 wrote: The stem says that the closing price is close to 40, so it’s not below 40.
Click to expand...
No, it doesn’t.
Reread the stem.
Analyst0718 wrote: Hey C is the correct answer.
Click to expand...
C is not correct.
Once again, the initial margin has nothing to do with whether or not the investor gets a margin call; that depends only on the maintenance margin.
 
I would go with B.Usually, when price falls below 40 in this case, the margin call amount would equal to meet initial margin requirement. Maybe, that s why q bank referred C as correct opt.
 
C is correct. Your initial margin is used to calculate your initial equity $ per share, which is the 0.6 x 50 = 30. This is your starting point. I agree with you 100% that the margin call price is based on your maintenance margin, but you have to start with your amount of equity per share that is dictated by your initial margin. Look at my calc, note how i used 25%, or the maint. margin to the right side of the equation. This is how the book does it, and that’s why C is the right answer.
 
Analyst0718 wrote: C is correct. Your initial margin is used to calculate your initial equity $ per share, which is the 0.6 x 50 = 30. This is your starting point. I agree with you 100% that the margin call price is based on your maintenance margin, but you have to start with your amount of equity per share that is dictated by your initial margin. Look at my calc, note how i used 25%, or the maint. margin to the right side of the equation. This is how the book does it, and that’s why C is the right answer.
Click to expand...
C is not correct.
You get a margin call based on whether or not you meet the maintenance margin, not the original margin.
 
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