Suppose that you sell short 250 shares of Weston (WN), currently selling for $80 per share, and give your broker $15,000 to establish your margin account.
a. If you earn no interest on the funds in your margin account, what will be your rate of return after one year if WN stock is selling at (i) $88; (ii) $80; (iii) $72? Assume that WN pays no dividends.
b. If the minimum margin is 30%, how high can WN's price rise before you get a margin call?
c. Redo parts (a) and (b), now assuming that WN's dividend (paid at year-end) is $2 per share.