You decide to sell short 100 shares of Charlotte Horse Farms when it is selling

Question

You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its yearly high of $56. Your broker tells you that your margin requirement is 45 percent and that the commission on the purchase is $155. While you are short the stock,Charlotte pays $2.50 per share dividend. At the end of one year, you buy 100 shares of Charlotte at $45 to close out your position and are charged a commission of $145 and 8 percent interest on the money borrowed. What is your rate of return on the investment?

Explanation / Answer

BEGIBIBG VALUE=56 X100 =5600

INITIAL INVESTMENT =MARGINAL REQUIREMENT +COMMISION

= .45 X5600 + 155= 2675

ENDING VALUE= 45 X 100=4500

DIIVIDEND =2.50 X100= 250

TRANSZCTIONS COSTS=155 +145 =300

INTEREST =0.8 X (.55 X 5600)= 246 .40

PROFIT =5600 -4500-250-246.40= 303.60

RATE OF RETURN ON YOUR INVESTMENT =303.6/ 2675=11.35%

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