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.
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 pays no dividends
b) If the maintenance margin is 25%, how high can XTel’s price rise before you get a margin call?
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.