USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your margin requirement is 60 percent and the commission on the sale is $50 and the broker charges 10 percent annual interest. AMF Corporation paid a $0.50 per share dividend while you were short the stock. After one year, you cover your short sale at $35 per share with a $50 commission for the purchase.
-Refer to Exhibit 3.8. What is your total dollar return on this investment?
A) $1,000
B) $900
C) $850
D) $670
E) $520

Question

Quizplus · Accepted Answer

First, let's calculate the initial proceeds from the short sale:
100 shares x $45 per share = $4,500
Commission on sale: $50
Total proceeds: $4,450 ($4,500 - $50)

Since the margin requirement is 60%, you need to deposit:
60% x $4,500 = $2,700

You also need to pay interest on this amount for one year at 10%:
Interest = $2,700 x 10% = $270

After one year, AMF Corporation paid a dividend of $0.50 per share, so you need to pay:
100 shares x $0.50 per share = $50

Now, let's calculate the cost of covering the short sale:
100 shares x $35 per share = $3,500
Commission on purchase: $50
Total cost of covering: $3,550 ($3,500 + $50)

Your total dollar return is:
Total proceeds - Deposit - Interest - Dividend - Cost of covering
= $4,450 - $2,700 - $270 - $50 - $3,550
= -$120

Since your total dollar return is negative, you had a loss of $120 on this investment.