P2.7 Marlene Bellamy purchased 3000 shares of Writeline Communications Limited at $5.50 per share using a margin loan to finance 50% of the purchase. She held the shares for exactly four months and sold them without any brokerage costs at the end of that period. During the four-month holding period, the shares paid $0.15 per share in cash dividends. Marlene was charged 9% annual interest on the margin loan. The maximum loan to value ratio allowed by the margin lender was 75%.

a. Calculate the initial value of the transaction, the margin loan balance and the equity position on Marlene’s transaction.

b. For each of the following share prices, calculate the actual margin loan to value percentage and indicate whether Marlene’s margin loan account would have excess equity or be subject to a margin call.

i. $4.50 ii. $7 iii. $3.30

c. Calculate the dollar amount of (i) dividends received and (ii) interest paid on the margin loan during the four-month holding period.

d. Use each of the following sale prices at the end of the four-month holding period to calculate Marlene’s annualised rate of return on the Writeline Communications share transaction.

i. $5 ii. $6 iii. $7