Suppose that you sell short 500 shares of XTel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account

Finance Nov 03, 2021

Suppose that you sell short 500 shares of XTel, currently selling for $40 per share, and give your broker $15,000 to establish your margin account.

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%

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 stock is selling at (i) $44; (ii) $40; (iii) $36? Assume that XTel has paid a year-end dividend of $1 per share.

b) If the maintenance margin is 25%, how high can XTel’s price rise before you get a margin call? Assume that XTel has paid a year-end dividend of $1 per share.

Please include step by step solutions (formulas)