In January $2019,$ Mr$.$ Tom McInish won a prize of $ $900,000.$ Tom decided to sit on his

money waiting for a good investment chance. For the last few years, Tom has been

educating himself about the stock market. Tom heard a lot of investment professionals

talking about making money by investing in new stocks offered to the public at initial

public offerings $($IPOs$).$ So$,$ Tom is waiting for a good IPO to jump into the market. Tom

started to learn about an upcoming IPO of an automobile company that so many people

believe will change the future of the industry in the US and globally, that$$s Green Motors

$($GRMT$).$ Tom likes this new company so much and is ready to start his investment

journey once the stock goes public on Dec $29$th

$,2019.$

$$ Tom was not able to purchase the stock at the IPO price of $$10.$ However, he purchased

the shares in the secondary market for $$15$ per share on January $1$st$,2020.$ His account

manager is also very positive about GRMT$,$ so she advised him to use the maximum

allowed margin to maximize his returns from this great investment opportunity. Tom$$s

broker's initial margin requirement is $60\%$ and she charges an interest rate of $5\%.$

$1)$ Jan $2020,$ he invested all his money $($$$900,000)$ in this stock, how much money will Tom

borrow from his broker to use the entire margin in this transaction?

a$)$ $$900,000$

b$)$ $$300,000$

c$)$ $$600,000$

d$)$ $$1500,000$

e$)$ $$540,000$

$2)$ How many shares did he purchase if he used the entire allowed margin?

a$)90,000$ shares

b$)30,000$ shares

c$)15,000$ shares

d$)100,000$ shares

e$)60,000$ shares

$3)$ What is the minimum initial margin requirement as specified by the Federal Reserve

system?

a$)70\%$

b$)50\%$

c$)60\%$

d$)40\%$

e$)45\%$

$4)$ one year later in Jan $2021,$ the price of GRMT declined to $$12.$ What is his new margin $\%$

now?

a$)50\%$

b$)45\%$

c$)40\%$

d$)47\mathrm{.}5\%$

e$)40\mathrm{.}5\%$

$5)$ Mr$.$Tom is concerned about receiving a margin call from his broker at this point.

If you know that his broker has a maintenance margin of $45\%,$ would you agree with him

on his concern?

a$)$ Yes, he should expect a margin call at this point because his new margin is now more

than the maintenance margin.

b$)$ Yes, he should expect a margin call at this point because his margin now is less than

the maintenance margin.

c$)$ No$,$ he should not expect a margin call at this point because his new margin is now

more than the maintenance margin.

d$)$ No$,$ he should not expect a margin call at this point because his margin now is less

than the maintenance margin.

$6)$ based on your calculations Tom would receive a margin call at this point of the year if the

GRMT price reaches?

a$)$ $$15\mathrm{.}93$

b$)$ $$10\mathrm{.}73$

c$)$ $$12\mathrm{.}00$

d$)$ $$12\mathrm{.}55$

e$)$ $$11\mathrm{.}46$

$7)$ Now, it is the end of the year $2021,$ Tom sold all his GRMT shares at $$20$ per share. What

was his rate of return on this investment?

a$)25\mathrm{.}00\%$

b$)70\mathrm{.}00\%$

c$)48\mathrm{.}89\%$

d$)68\mathrm{.}50\%$

e$)67\mathrm{.}16\%$

$8)$ How much money does Tom have now?

a$)$ $$2000,000$

b$)$ $$1,340,000$

c$)$ $$1,370,000$

d$)$ $$1,500,000$

e$)$ $$1,750,000$