Exhibit 4.4
Use the Information Below for the Following Problem(S)
You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35. Your broker tells you that your margin requirement is 55 percent and that the commission on the sale is $15. While you are short, Davis pays a $0.75 per share dividend. At the end of one year you buy your Davis shares (cover your short sale) at $30 and are charged a commission of $15 and a 6 percent interest rate.
-Refer to Exhibit 4.4.What is your rate of return on the investment?
A) 10.48%
B) 12.87%
C) 13.98%
D) 15.49%
E) 18.87%

Question

Quizplus · Accepted Answer

Rate of Return = Profit ¸ Initial Investment
Initial investment = (.55 × $3500)+ $15 = $1,940
$ \therefore $ Rate of Return = $300.50/$1,940 = 15.49%

Exhibit 4.4 Use the Information Below for the Following Problem(S)