Question

Suppose that you sell short 500 shares of Xtel, currently selling for $70 per share, and give your broker $25,000 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 Xtel stock is selling at: (i) $74; (ii) $70; (iii) $66? Assume that Xtel pays no dividends. (Leave no cells blank - be certain to enter "0" wherever required. Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

b. If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call? (Round your answer to 2 decimal places.)

c. Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid. (Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.)

Answer 1

	Current Price of Share	70
	No. of Shares shorted	500
	Value of Trade	35000
	Deposit in Margin Account	25000
a.	price after 1 yr	74	70	66
	Profit or loss per share	-4	0	4
	Rate of Return	-5.71%	0.00%	5.71%	(profit/loss devided by current share price)*100
b.	Margin to be placed on current value	8750
	Ratio between the total margin on current trade and total margin in acount	2.857142857
	Price of the stock before the margin is recalled	200			(current price multiplied by ratio)
c. i	price after 1 yr	74	70	66
	dividend	1	1	1
	Profit or loss per share	-3	1	5
	Rate of Return	-4.29%	1.43%	7.14%	(profit/loss devided by current share price)*100
ii	Margin to be placed on current value	8750
	Dividend earned	500
	Net Margin	8250
	Ratio between the total margin on current trade and total margin in account	3.03
	Price of the stock before the margin is recalled	212.10000			(current price multiplied by ratio)

Please note that the answer to the c.ii part of the question is provided assuming that the dividend is deposited by Xtel in brokers account and not directly in individuals account. If the dividend is drposited in individuals account then the answer to part (b.) and part (c.ii.) will be the same.