Question

# You sell short 200 shares of Doggie Treats Inc. which are currently selling at \$52 per...

You sell short 200 shares of Doggie Treats Inc. which are currently selling at \$52 per share. You post the 50% margin required on the short sale. If your broker requires a 28% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account and the firm does not pay any dividends)

You short-sell 217 shares of Alibaba, at \$108 per share. If you wish to limit your maximum loss to \$5,000, you should place a stop-buy order at ____. Ignore any dividends, trading costs, and margin interest.

VLC Inc. sold 200,000 shares in an initial public offering. The underwriter's explicit fees were \$57 thousand. The offering price for the shares was \$39, but immediately upon issue, the share price jumped to \$55. What is the best estimate of the total cost to the firm of the equity issue?

1). Sale Proceeds from short sell = No. of shares * Current Price = 200 * \$52 = \$10,400

Amount deposited by investor = Sale Proceeds from short sell * Margin Requirement

= \$10,400 * 0.50 = \$5,200

Total Margin Requirement = Sale Proceeds + Amount deposited by investor

= \$10,400 + \$5,200 = \$15,600

Let the stock Price = P

So, Cost of buying the asset = No. of shares * Shares Price = 200 * P

You will receive a margin call when the total required margin is higher than the total initial margin, i.e.,

Maintenance Margin = [Total Margin Requirement - Cost of buying the asset] / Cost of buying the asset

0.28 = [\$15,600 - (200 * P)] / (200 * P)

0.28 * (200 * P) = \$15,600 - (200 * P)

(56 * P) = \$15,600 - (200 * P)

(56 * P) + (200 * P) = \$15,600

(256 * P) = \$15,600

P = \$15,600 / 256 = \$60.9375

2). Sale Proceeds from short sell = No. of shares * Current Price = 217 * \$108 = \$23,436

Let the stock Price = P

So, Cost of buying the asset = No. of shares * Shares Price = 217 * P

Loss = Cost of buying the asset - Sale Proceeds from short sell

\$5,000 = (217 * P) - \$23,436

217 * P = \$5,000 + \$23,436

217 * P = \$28,436

P = \$28,436 / 217 = \$131.04

3). Underpricing Cost = [Current Share Price - Offer Price] * No. of shares

= [\$55 - \$39] * 200,000 = \$16 * 200,000 = \$3,200,000

Total Cost = Underpricing Cost + Underwriter's Fees

= \$3,200,000 + \$57,000 = \$3,257,000

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