You decide to sell short 200 shares of Charlotte Horse Farms when it is selling at...
You decide to sell short 200 shares of Charlotte Horse Farms when it is selling at its yearly high of $59. Your broker tells you that your margin requirement is 55 percent and that the commission on the purchase is $350. While you are short the stock, Charlotte pays a $2.65 per share dividend. At the end of one year, you buy 200 shares of Charlotte at $48 to close out your position and are charged a commission of $345 and 10 percent interest on the money borrowed. What is your rate of return on the investment? Do not round intermediate calculations. Round your answer to two decimal places.
Homework Answers
Beginning Value of Investment = $59.00 x 200 shares = $11800
Investment = (55%x $11800) + $350 = $6490 + $350 = $6840
Ending Value of Investment = $48.00 x 200 = $9600
Dividends = $2.65 x 200 shares = $530.00
Transaction Costs = $350 + $345 = $695.00
Interest = 10% x (45% x $11800) = $531.00
Profit = $11800 - $9600 - $530 - $695 - $531 = $444
Rate of return of $6840 = $444/$6840 = 6.49%
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