Question

# The current market price for ABC is \$49 per share. Initial margin is 50%, maintenance margin...

The current market price for ABC is \$49 per share. Initial margin is 50%, maintenance margin is 35% and there is no margin interest. ABC pays annual cash dividends of \$2.75 per share. You believe the stock price will decrease over the next year and wish to sell short using margin. Suppose you are correct and the stock falls to \$38 per share at the end of the year.

a. Return on assets = (Price at the beginning of the year - Price at the end of the year - Dividend)/Price at the beginning of the year

Return on assets = (49 - 38 - 2.75)/49

Return on assets = 8.25/49

Return on assets = 0.1683673469

Return on assets = 16.83673469%

b. Return on equity = (Price at the beginning of the year - Price at the end of the year - Dividend)/(Price at the beginning of the year * Initial margin)

Return on equity = (49 - 38 - 2.75)/(49 * 0.50)

Return on equity = 8.25/24.5

Return on equity = 0.3367346939

Return on equity = 33.67346939%

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