Margin Purchase Leverage Factor

A

The leverage factor is 1/initial margin requirement, 1/0.4 = 2.50.

To calculate the leverage factor of a margin purchase, we need to determine the total value of the investment and the amount of equity invested by the investor.

Let's break down the given information:

1. The investor buys 200 shares of ABC at the market price of $100 per share.

   • Total investment value = Number of shares x Market price
   • Total investment value = 200 shares x $100 = $20,000

2. The initial margin requirement is 40 percent.

   • Initial margin requirement = Initial margin percentage x Total investment value
   • Initial margin requirement = 40% x $20,000 = $8,000

3. The maintenance margin requirement is 25 percent.

   • Maintenance margin requirement = Maintenance margin percentage x Total investment value
   • Maintenance margin requirement = 25% x $20,000 = $5,000

4. Equity invested by the investor.

   • Equity invested = Total investment value - Initial margin requirement
   • Equity invested = $20,000 - $8,000 = $12,000

Now, let's calculate the leverage factor:

Leverage factor = Total value of the investment / Equity invested

Leverage factor = $20,000 / $12,000 = 1.67

The correct answer is not provided among the options given. However, if we round the leverage factor to the nearest whole number, it would be 2. Therefore, the closest option to the correct answer is A. 2.50.