Question

On January 1, you sold short four round lots (that is, 400 shares) of Four Sisters stock at $63 per share. On March 1, a dividend of $1.50 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $58 per share. You paid 50 cents per share in commissions for each transaction. What is the value of your account on April 1?

Answer 1

Answer:

Value of the account on April 1 = $1000

Explanation:

Proceeds obtained from the short sale = Number of shares * Price per share = 400 * $63 = $25,200

Commissions paid during the short sale = Commission per share * Number of shares

                                                                     = 0.5 * 400 = $200

Net proceeds from the short sale = Proceeds – Commissions = 25,200 – 200 = $25,000

Total dividend paid = Number of shares * Dividend per share = 400 * 1.5 = $600

Money paid in covering the short sale = Number of shares * Price = 400 * $58 = $23,200

Commissions paid in covering the short sale = Commission per share * Number of shares

                                                                             = 0.5 * 400 = $200

Total money paid in covering the short sale = Money paid in covering the short sale  + Commissions paid in covering the short sale

Total money paid in covering the short sale  = 23,200 + 200 = $23,400

Value of the account = Net proceeds from the short sale – Dividend paid – Money paid

                                   = $25,000 - $600 - $23,400 = -$1000

Value of the account = $1000

Answer 2

Answer:

Value of the account = -$900

Explanation:

Accumulated profits from the short sale = Number of shares x Price per share

= 300 x $50 = $15,000

Commissions that are paid during the short sale = Commission per share x Number of shares

= 0.5 x 300 = $150

The Net proceeds from the short sale = Proceeds – Commissions

= 15000 – 150 = $14,850

Total dividend paid = Number of shares x Dividend per share

= 300 x 3 = $900

Money paid in covering the short sale = Number of shares x Price

= 300 x $49 = $14,700

Commissions paid in covering the short sale = Commission per share x Number of shares

= 0.5 x 300 = $150

Total money paid in covering the short sale

= 14700 + 150 = $14,850

Therefore, Value of the account = Proceeds – Dividend paid – Money paid

= $14,850 - $900 - $14,850 = -$900

Value of the account = -$900