Question

You decide to sell short 300 shares of Charlotte Horse Farms when it is selling at its yearly high of $57. Your broker tells you that your margin requirement is 45 percent and that the commission on the purchase is $495. While you are short the stock, Charlotte pays a $2.30 per share dividend. At the end of one year, you buy 300 shares of Charlotte at $47 to close out your position and are charged a commission of $480 and 8 percent interest on the money borrowed. What is your rate of return on the investment? Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

The rate of return is computed as shown below:

= (Number of shares x Selling price per share - Number of shares x Purchase price per share - Number of shares x dividend per share - commission on purchase and sale - Number of shares x selling price per share x (1 - margin requirement) x interest rate) / (Margin requirement x Number of shares x selling price per share + commission of $ 495)

= (300 x $ 57 - 300 x $ 47 - 300 x $ 2.30 - $ 495 - $ 480 - 300 x $ 57 x (1 - 0.45) x 8% ) / (0.45 x 300 x $ 57 + $ 495)

= ($ 17,100 - $ 14,100 - $ 690 - $ 495 - $ 480 - $ 752.4) / $ 8,190

= $ 582.6 / $ 8,190

= 7.11% Approximately

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