An investor creates a margin account and deposits $3,000. They buy $6,000 in stock, making...
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An investor creates a margin account and deposits $3,000. They buy $6,000 in stock, making a $3,000 margin loan. The value of the stock drops to $4,000 so her equity ratio is now 25% (Equity $1,000 / Market Value of Stock $4,000). She receives a margin call that says she must increase the equity ratio to 35%. She wants to sell enough stock to bring the equity ratio from 25% to 35% rather than send more cash to the broker.
How much stock must she sell to meet the margin call? Note that the cash she receives by selling shares is used to reduce the margin loan.
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