Sergio bought 250 shares of Silicon Acme @ 20 through his margin account. Then the stock plummets to $7.50 a share. Calculate the market value, debit balance, and customer equity if his brokerage firm's margin rate is set 60%.
I got...
market value = $1875
debit balance = $750
customer equity = $1125
Is that correct? Please check!
Thanks a lot!
To calculate the market value, debit balance, and customer equity in this scenario, you need to consider the margin rate set by the brokerage firm. The margin rate in this case is 60%.
First, let's calculate the market value, which is the current value of the shares Sergio purchased. Sergio bought 250 shares of Silicon Acme for $20 each. Since the stock plummets to $7.50, the market value can be calculated as:
Market Value = Number of Shares * Current Stock Price
Market Value = 250 * $7.50
Market Value = $1,875
So, the market value is $1,875.
Next, let's calculate the debit balance, which represents the amount borrowed by Sergio to purchase the shares. Since Sergio bought 250 shares at $20 each, the total cost of the purchase is:
Total Cost = Number of Shares * Purchase Price
Total Cost = 250 * $20
Total Cost = $5,000
Since Sergio purchased the shares through his margin account, he only needed to pay a portion of the total cost, and the brokerage firm covered the rest based on the margin rate. Therefore, the debit balance can be calculated as:
Debit Balance = (Total Cost - Initial Payment)
Debit Balance = (Total Cost - (Margin Rate * Total Cost))
Debit Balance = ($5,000 - (0.60 * $5,000))
Debit Balance = ($5,000 - $3,000)
Debit Balance = $2,000
So, the debit balance is $2,000.
Finally, let's calculate the customer equity, which represents the portion of the investment that is funded by Sergio's own money. The customer equity can be calculated as:
Customer Equity = Market Value - Debit Balance
Customer Equity = $1,875 - $2,000
Customer Equity = -$125
So, the customer equity is -$125, indicating that Sergio's account currently has a negative equity, which means his margin account has suffered a loss greater than his own investment.
Based on the calculations, it seems that your answers are not correct. The correct values are:
- Market value = $1,875
- Debit balance = $2,000
- Customer equity = -$125
I hope this explanation helps you understand how to calculate the market value, debit balance, and customer equity in a margin account scenario.