Question

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. What is your percentage return on assets for this trade?

b. What is your percentage return on equity for this trade?

Answer 1

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%