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Homework answers / question archive / 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
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)
