You are the lead analyst at QAR hedge fund. You decide to short 100 shares of MGE stock when it is selling at $100. Your broker for this transaction imposes an initial margin requirement is 100%. You have cash to put down only 60% of the short sale value. Your broker lets you borrow the remaining 40% due to past relationship between the two firms. The commission on the sale is $25. Your broker's maintenance margin is 25%.
(a) At what price of MGE stock will you receive a margin call from your broker?
(b) Due to an FDA approval of a new drug, MGE shares rose to as much as$130 per share. How much additional money must you deposit to bring the current margin to your broker's maintenance margin?
(c) You decide to buy back shares at $90 to cover your short position at the end of one year. What is the ROIC for this transaction? You pay a commission of $15 on closing. While you are short, MGE paid a $0.5 per share dividend. Your broker charges a 10 percent interest rate.

Answer rating: 100% (QA)

Let s calculate each part of the margin call and the return on investment for this short sale transa View the full answer