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You have a margin account with a broker. The required initial and maintenance margin ratios of the account are 60% and 35%, respectively.
You have a margin account with a broker. The required initial and maintenance margin ratios of the account are 60% and 35%, respectively. The broker charges an interest rate of 8% per year on the loans, and applies it annually.
You are bullish on the stock of Netflix, currently priced at $200 per share. You buy 50 shares of NFLX utilizing the account's leveraging feature to its fullest extent. NFLX is not expected to pay any dividends in the foreseeable future.
(a) How much would you need to deposit initially?
Suppose a year has passed since the initial investment and the price of the stock is $260.
(b) What is the return on your equity?
(c) How much cash can you withdraw from the account without violating the maintenance margin requirement?
