Question

You just sold short 900 shares of Wetscope, Inc., a fledgling software firm, at $65 per share. You cover your short when the price hits $55.50 per share one year later. If the company paid $0.83 per share in dividends over this period, what is your rate of return on the investment? Assume an initial margin of 70 percent. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Answer:

Rate of Return on the investment = = 19.05%

Explanation:

The question is to determine the rate of return based on the information given as follows

First, Determine the Proceeds on the short sales

= 900 shares x $65= $58,500

2) What is the initial margin deposit = $58,500 x (initial marginal rate 70%)

= $40,950

3) Compute the total Assets = Total Liabilities + Equity

= $58, 500 + $40,950

= $99,450

4) Compute the cost of covering short = 900 shares x $55.5 = $49,950

5) Determine the Account Equity = Total Assets - Cost of Covering Short

= $99,450 - $49,450 = $49,500

6)Compute the cost of covering dividends = 900 shares x ($0.83) = $747

7) Determine the profit in dollar = Account equity- Initial Margin Deposit - Cost of covering dividends

= $49,500- $40,950-$747 = $7,803

8) Determine the rate of return

= Profit in dollar / Initial Margin deposit x 100

= $7,803 / $40,950 x 100

= 19.05%