Exhibit 4.5
Use the Information Below for the Following Problem(S)
You decide to sell 100 shares of Topgun Enterprises Inc. short when it is selling at its yearly high of $42.25. Your broker tells you that your margin requirement is 60 percent and that the commission on the sale is $20. While you are short, Topgun pays a $0.85 per share dividend. At the end of one year you buy your Topgun shares (cover your short sale) at $44 and are charged a commission of $20 and a 5 percent interest rate.
-Refer to Exhibit 4.5.What is your rate of return on the investment?
A) 10.48%
B) 12.87%
C) -13.98%
D) -24.49%
E) -15.05%

Question

Quizplus · Accepted Answer

Rate of Return = Profit ¸ Initial investment
Initial investment = (0.60 × $4225)+ 20 = $2,555
$ \therefore $ Rate of Return = -$384.50/$2,555.00 = -15.05%

Exhibit 4.5 Use the Information Below for the Following Problem(S)