Question

You just sold short 1,250 shares of Wetscope, Inc., a fledgling software firm, at $97 per share. You cover your short when the price hits $87.50 per share one year later. If the company paid $0.77 per share in dividends over this period, what is your rate of return on the investment? Assume an initial margin of 60 percent. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Proceeds from short sale = 1,250($97) = $121,250

Initial margin deposit = $121,250(.60) = $72,750

Total assets = Total liabilities and equity = $121,250 + $72,750 = $194,000

Cost of covering short = 1,250($87.50) = $109,375

Account equity = $194,000 – $109,375 = $84,625

Cost of covering dividends = 1,250($.77) = $962.5

Dollar profit = $84,625 – $72,750 – $962.5 = $10,912.5

Rate of return = $10,912.5 / $72,750 = 15.00%