Suppose that you sell short 500 shares of Xtel, currently selling for $40 per dshare,

given your broker $15,000 to establish your margin account.

DATA

Shares sold short: 500 shares

Selling price: 40.00 $/share

Equity for margin: $15,000.00

Dividend: 1.00 $/share

Maintenance marging requirement: 25.00%

Interest on margin loan: 8.00%

QUESTIONS

a) if you earn no interest on the funds in your margin account, what will be your rate

of return after one year if Xtel stocks is selling at i), ii) and iii) assuming

Xtel pays no dividend

i)44.00 $/share

ii)40.00 $/share

iii)36.00 $/share

Cash received in the short sell

Cash spent in buy the stock back

Profit

Rate of return

b) If the maintenance margin is 25%, how high can Xtels price rise before you get a

marging call?

Price

Margin