Question 1 [8 marks]

In anticipation of a bullish market, Maverick bought 200 shares of stock at a price of $10 a share. He used his 70% margin account to make the purchase. Maverick sold his stock after a year for $12 a share and during the holding period the issuer paid $0.50 per share as dividend. If the broker charges margin interest at 5%,

(i) compute Maverick's return on investor's equity for this investment.

(ii) if the maintenance margin is set at 25%, determine the price when margin call will be received and explain the repercussion if the call is ignored.