"Equity Investments": Market Organization and Structure

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Questions 1:

A company that pursues differentiation as its competitive strategy is most likelyto emphasize:

A、strong market research.

B、 efficient operating and reporting systems.

C、 defensive market positions.

Questions 2:

A trader buys 500 shares of a stock on margin at $36 a share using an initial leverage ratio of 1.66. The maintenance margin requirement for the position is 30%. The stock price at which the margin call will occur is closest to:

A 、$25.20.

B 、$30.86.

C、 $20.57.

View answer resolution

【Answer to question 1】A

【analysis】

A is correct. A company that follows a product or service differentiation strategy needs to emphasize market research to identify and match customer needs with product development and marketing for which customers are willing to pay a premium.

【Answer to question 2】C

【analysis】

C is correct. Initial equity (%) in the margin transaction = 1/Leverage ratio = 1/1.66 = 0.60. Initial equity per share at the time of purchase = $36 × 0.60 = $21.60 Price (P) at which margin call occurs: Equity per share/Price per share = Maintenance margin (%)

Equity Investments:Market Organization and Structure

A is incorrect. It simply takes (1 – maintenance margin %) of the initial price as the critical price for margin call: $36 × (1 – 0.3) = $25.20.

B is incorrect. The mistake is in taking 0.40 as the initial equity. Initial equity per share at the time of purchase = $36 × 0.40 = $14.40 Price at which margin call occurs:

Equity per share/Price per share = Maintenance margin %

Equity Investments:Market Organization and Structure