Exhibit 4.6
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%. While you are short, the stock pays a $1.75 per share dividend. Interest on margin debt is 5.25% per year.
-Refer to Exhibit 4.6. 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% commission on the purchase.)
A)-40.64%
B)-25.53%
C)5.21%
D)72.7%
E)-71.2%

Question

Quizplus · Accepted Answer

The rate of return is calculated by considering the initial sale proceeds, the cost to cover the short position, dividends paid, commissions, and interest on margin debt. The stock price increased from $75 to $90, resulting in a loss when covering the short position. Additionally, dividends and commissions further reduce the return.

Exhibit 4.6 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)