Suppose that you sell short 400 shares of Xtel, currently selling for $50 per sh

Question

Suppose that you sell short 400 shares of Xtel, currently selling for $50 per share, and give your broker $8,000 to establish your margin account. o. 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 $54: () $50; (ii) $44? Negative values should be indicated by a minus sign. Round your answers to 2 decimal places.) Assume that Xtel pays no dividends. (Leave no cells blank-be certain to enter"O" wherever required. i. Rate of return ii. Rate of return ili. Rate of return (20.001% 30 001 % 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.) Margin call will be made at price

Explanation / Answer

b) Assets = Invested cash + Proceeds from sale - $ 8000 +(400*50) - $ 28000 Liability - Value of shares owed 400P Equity - Assets - Laibilities 28000- 400P Margin - (28000-400P)/400P Margin call would be received if the margin rate is less than 25% (28000-400P)/400P < 0.25 28000 - 400 P < 100 P 28000 < 500 P P > $ 56 c) Assets = Invested cash + Proceeds from sale - Dividend 15000 + 8000 - (2*400) $27,200 Liability would be 400P Price is $ 54 Return on Assets - 27200 - (54*400)/8000 - 1 5600/8000 - 1 -30% Price is $ 50 Return on Assets - 27200 - (50*400)/8000 - 1 7200/8000 - 1 -10% Price is $ 44 Return on Assets - 27200 - (44*400)/8000 - 1 9600/8000 - 1 20% d) Assets = Invested cash + Proceeds from sale - $ 8000 +(400*50) - 800 = $ 27200 Liability - Value of shares owed 400P Equity - Assets - Laibilities 27200- 400P Margin - (27200-400P)/400P Margin call would be received if the margin rate is less than 25% (27200-400P)/400P < 0.25 27200 - 400 P < 100 P 27200 < 500 P P > $ 54.40

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