Question

You decide to sell 1,000 shares of Marston Industries short when it is selling at ¢35. Your broker requires an initial margin deposit of 55 percent with no commission on the sale and a 6 percent interest rate on your margin loan. While you are short, Marston Industries pays a 75 pesewas per share dividend. At the end of one year you buy Marston Industries shares to cover your short sale at ¢30 and are charged a commission of ¢15. What is your rate of return on the investment?

Answer 1

Solution:-

First we need to calculate Profit from shares -

Profit = Sales Value - Buy Value - Dividend - Commision - Buy Value * Interest Rate * (1-Initial Margin)

Profit = 1,000 Shares * 35 - 1,000 * 30 - 1,000 * 0.75 - 15 - 35,000 * (0.06) * (1-0.55)

Profit = 35,000 - 30,000 - 750 - 15 - 945

Profit = 3,290.

To calculate Initial Investment -

Initial Investment = 35,000 * 0.55 = 19,250.

To Calculate Rate of Return on Investment -

Rate of Return =

Rate of Return =

Rate of Return on Investment = 17.09%

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