Question

You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly high of $56. Your broker tells you that your margin requirement is 65 percent and that the commission on the purchase is $180. While you are short the stock, Charlotte pays a $2.55 per share dividend. At the end of one year, you buy 100 shares of Charlotte at $42 to close out your position and are charged a commission of $170 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.

Answer 1

Given,

No. of shares = 100

Current price = $ 56

Margin requirement = 65% or 0.65

Commission on purchase = $ 180

Dividend per share = $ 2.55

Price after one year = $ 42

Commission after one year = $ 170

Interest rate = 10%

Solution :-

Beginning value of Investment - No. of shares & Current Price = 100 shares & $56 = $5600 Investment = /Beginning Value & Margin + Commission of Investment requirement) on Purchase = ($5600 x 65%) + $180 = $3640 + $180 = $3820 Ending value of Investment - No. of shares & Price after one year = 100 shades x $42 = $ 4200 Dividends = No. of shares & dividend per share = 100 shares X $2.55 - $ 255 Transaction Costs = Commission on t Commission after Purchase one year

interest rate = $ 180 + $10 = $350 Interest = Beginning Value (1-margin of investment requirement - [ $ 5600 (1 – 0.65)] e 10% = ($5600 (0.35] x 10% = $1960 x 10% = $196 Profit = Beginning Value - Ending Value - Dividends. of Investment of Investment - Transaction costs - Interest = $5600 - $4200 - $255 - $350 - $196 = $599 Rate of return - Profit Investment $599 $3820 = 0.1568 or 15.68%.