Question

You decide to sell 100 shares of Topgun Enterprises short when it is selling at a yearly high of $42.25 .your broker tells you that you're in margin requirement at 60% and if the commission on the sale is $20. wow you are short topgun pays a $.85 per share dividend. at the end of one year you buy your topgun shares (cover youre short sale) at $44 and are charged a commission are $20 and a 5% interest rate what is your rate of return on the investment

*your margin requirement

Answer 1

Loan Amount = [Short Price*Shares Outstanding] * [1 - Initial Margin]

= [$42.25*100] * [1-0.60] = $4225 * 0.40 = $1690

Interest Paid = Loan Amount * Interest Rate = $1690 * 0.05 = $84.50

Profit = [Short Price*Shares Outstanding] - [Purchase Price*Shares Outstanding] - [DPS*Shares Outstanding] - Commission on short-sell - Commission on purchase - Interest Paid

= [$42.25*100] - [$44*100] - [$0.85*100] - $20 - $20 - $84.50

= $4225 - $4400 - $85 - $124.50

= -$384.50

Initial Investment = [Initial Margin * Total Investment Value] + Commission

= [0.60 * $4225] + $20 = $2,555

Rate of Return = Profit/Initial Investment = -$384.50/$2555 = -0.1505, or -15.05%