Question

You just sold short 750 shares of Wetscope, Inc., a fledgling software firm, at $67 per share. You cover your short when the price hits $57.50 per share one year later. If the company paid $0.87 per share in dividends over this period, what is your rate of return on the investment? Assume an initial margin of 70 percent. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

	Rate of return %

Answer 1

Rate of Return:

Sale Proceeds = Number of shares*Selling price per share

= 750 shares*$67 per share

= $50,250

Initial margin deposit = Sale Proceeds*initial margin percent

= $50,250*70%

= $35,175

Total assets = $50,250 + $35,175

= $85,425

Cost of covering short = 750 * $57.50

= $43,125

Account Equity = $85,425 - $43,125

= $42,300

Cost of covering dividends = 750*$0.87

= $653

Dollar Profit = $42,300 - $35,175 - 653

= $6,472

Rate of Return = $6,472/$35,175

= 18.40%

Therefore, the rate of return is 18.40%.