Exhibit 4-5
USE THE FOLLOWING INFORMATION FOR THE NEXT 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% 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% interest rate.
-Suppose you buy a round lot of DG Solutions stock on 60% margin when it is selling at $55 per share. The broker charges a 10% annual interest rate and commissions are 3% of the total stock value on both the purchase and the sale. If at year end you receive a $1.10 per share dividend and sell the stock for 55 5/8, what is your rate of return on the investment?

Question

Quizplus · Accepted Answer

For the short sale of Topgun Enterprises Inc., the initial proceeds are $4,225 (100 shares * $42.25). The initial margin requirement is 60% of $4,225, which is $2,535. The cost to cover the short sale is $4,400 (100 shares * $44), plus $20 commission and $85 for dividends paid (100 shares * $0.85), totaling $4,505. The interest on the margin loan is 5% of $2,535, which is $126.75. The total cost is $4,631.75 ($4,505 + $126.75), and the net loss is $406.75 ($4,631.75 - $4,225). For the DG Solutions stock, the purchase cost is $5,665 (100 shares * $55 * 1.03), and the selling price is $5,573.75 (100 shares * $55.625 * 0.97) plus $110 in dividends, totaling $5,683.75. The interest on the margin loan is $566.50 (10% of $5,665). The net gain is $52 ($5,683.75 - $5,665 - $566.50 + $110). Combining both transactions, the total investment is $9,890 ($4,225 + $5,665), and the net loss is $354.75 ($406.75 loss from Topgun and $52 gain from DG Solutions). The rate of return is -3.59% ($354.75 loss / $9,890 investment), but this calculation does not match any of the provided options, indicating a need for reevaluation of the calculation method or the interpretation of the given options.

Exhibit 4-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)