Suppose that you sell short 500 shares of Intel, 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 Intel stock is selling at: (i) $44; (ii) $40; (iii) $36? Assume that Intel pays no dividends.
b. If the maintenance margin is 25%, how high can Intel’s price rise before you get a margin call?
c. Redo parts (a) and (b), but now assume that Intel 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.
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