An investor has a margin account with $120,000 market value and $42,000 debit balance. If the investor wants to purchase an additional $60,000 of stock in this account, what amount must the investor deposit?

Explanations

Assuming Reg T at 50%, the investor would usually have to have to deposit $30,000 to meet the margin call. However, we have to figure out if there is any excess equity in his margin account to help with the $30,000 payment. LMV – DR = EQ. We have $120,000 worth of securities and we subtract the debit balance of $42,000. We now have $78,000 for EQ. Take 50% of the LMV for Reg T which gives us $60,000. subtract the debit balance of $42,000 and we know he has $18,000 more than necessary. This 18K is the SMA - Special Memorandum Account which he can use to offset the margin call for the 60,000 of stock he wants to buy. He needs ($30,000 at 50% Reg T) to buy the new stock. Subtracting the 18,000 SMA excess, he needs to deposit $12,000 to make the trade