USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You decide to sell short 200 shares of XCorp stock at a price of $75. Your margin deposit is 65 percent. Commission on the sale is 1.25 percent. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25 percent per year.
-Refer to Exhibit 3.6. Suppose at the end of one year XCorp is selling at $90 per share and you cover your short position at this price. What is your rate of return on the investment? (Assume a 1.25 percent commission on the purchase.)
A) -40.64 percent
B) -25.53 percent
C) 5.21 percent
D) 72.7 percent
E) -71.2 percent

Question

Quizplus · Accepted Answer

The rate of return is calculated by considering the initial investment, dividends paid, interest on margin debt, and the final stock price. The initial investment is 65% of $15,000 (200 shares at $75), minus the commission. The dividends and interest on margin debt are costs, and the final stock price is $90, with a commission on the purchase. The calculation results in a negative return of -40.64%.