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asambeis [7]
3 years ago
7

Comcast (CMCSA) is trading at 54.33. You decide to short sell 100 shares of their stock, providing 2850 in collateral to your br

oker. You hold the short position for one year and expect Comcast to pay a dividend of 1 per share. In one year, the stock price is 56. Assuming the brokerage account pays no interest on your cash, what is your return, relative to your collateral
Business
1 answer:
s344n2d4d5 [400]3 years ago
3 0

Answer: =-9.34%

Explanation:

Assuming the brokerage account pays no interest on your cash, the return, relative to the collateral will be calculated as:

= (Short sell price - dividend - Share buy price)/Capital employed

= (5433 - 100 - 5600) / 2850

= -267 / 2850

= -0.09368

=-9.34%

Note:

Short sell price = 54.33 × 100 = 5433

Dividend = 100

Share buy price = 56 × 100 = 5600

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3.5%

Explanation:

We will apply asset pricing model to calculate cost of equity (required rate of return). The capital asset pricing model is stated as below:

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Cost of equity (Beale) = 5.5% + 1.8 x (9% - 5.5%) = 11.8%

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<em />

<em>Note: You can also do quick calculation as below:</em>

<em>Cost of equity (Beale) - Cost of equity (Foley) = (Beta of Beale - Bete of Foley) x Market risk premium = (1.8 - 0.8) x (9% - 5.5%) = 3.5%</em>

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