Answer:
A. The stock is purchased for $40 x 300 shares = $12,000.
Given that the amount borrowed from the broker is $4,000, Dee's margin is the initial purchase price net borrowing: $12,000 - $4,000 = $8,000.
B. If the share price falls to $30, then the value of the stock falls to $9,000. By the end of the year, the amount of the loan owed to the broker grows to:
Principal x (1 + Interest rate) = $4,000 x (1 + 0.08) = $4,320.
The value of the stock falls to: $30 x 300 shares = $9,000.
The remaining margin in the investor's account is:
Margin on long position = "Equity in account " /"Value of stock"
= "$9,000 － $4,320" /"$9,000" = 0.52 = 52%
Therefore, the investor will not receive a margin call.
C. Rate of return = "Ending equity in account － Initial equity in account" /"Initial equity in account"
= "$4,680 － $8,000" /"$8,000" = - 0.4150 = - 41.50%
