Question

After an analysis of Lion/Bear, Inc., Karl O’Grady has concluded that the firm will face financial difficulty within a year. The stock is currently selling for $5 and O’Grady wants to sell it short. His broker is willing to execute the transaction but only if O’Grady puts up cash as collateral equal to the amount of the short sale. If O’Grady does sell the stock short, what is the percentage return he loses if the price of the stock rises to $9? Use a minus sign to enter the amount as a negative value. Round your answer to the nearest whole number. % What would be the percentage return if the firm went bankrupt and folded? Round your answer to the nearest whole number. %

Answer 1

Return = ((Current price - Future price)/Current price) * 100
= ((5 - 9)/5)*100
= (-4/5)*100
= -80%
The percentage loss on investment is 80%.