Due to COVID-19, Zeina opened an account to short-sell 500 shares of Eastern Tobacco (EAST). The initial margin requirement is 60%. A year later, the price of Eastern Tobacco (EAST) has fallen from EGP 18 to EGP16, and the stock has paid a dividend of EGP 0.25 per share. Zeina is paying to her broker commission per share 0.5 EGP.
a.What is the remaining margin (equity) in the Zeina’s account after the price decrease of Eastern Tobacco (EAST)?
b.What is the rate of return on the investment?
Below is our analysis of the case
The share price = EG18
Total shares = 500
Total share price value = 9,000
Margin Requirement = 60% * 9,000 = 5,400
1)
The price has decreased from 18 to 16, hence the New margin is = 16*500*60% = 4,800
Previous Margin requirement = 5,400
Remaining margin = Old - new = 5,400 - 4,800 = 600
2)
After a year, shares fell to 16
total Profit per share = 18 - 16 = 2
Profit overall = 2*500 = 1000
Commission = 0.5 * 500 = 250
Total profit = 750
Net return = 750 / 5400 = 14%
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