Question

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $25.00 per share. On March 1, a dividend of $2.50 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $16.20 per share. You paid 10 cents per share in commissions for each transaction.a. What is the proceeds from the short sale (net of commission)?Proceeds from the short sale___ $b. What is the dividend payment?Dividend payment ____ $c. What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $16.20 per share?Total cost including commission ____ $d. What is the net gain from your transaction?Net gain ____ $

Answer 1

Explanation:

The computations are shown below:

a. Proceeds from the short sale (net of commission)

= Number of shares × (Market selling price per share - commission per share)

= 100 × ($25 - $0.10)

= $2,490

b. The dividend payment is

= Number of shares × dividend paid per share

= 100 shares × $2.50

= $250

c. Total cost including commission is

= Number of shares × (Market purchase price per share + commission per share)

= 100 × ($16.20 + $0.10)

= $1,630

d. The net gain from your transaction is

= $2,490 - $1,630

= $860