You sold short 100 shares of Kraft Heinz Co. common stock on margin at $83.55 per share.Assume the initial margin is 50% and the maintenance margin is 30%.One year later, the stock price closes at $59.61, and it has paid cash dividends of $2.50 per share.What is your return on equity? Ignore margin interest.
You sold short 100 shares of Kraft Heinz Co. common stock on margin at $83.55 per share.Assume the initial margin is 50% and the maintenance margin is 30%.One year later, the stock price closes at $59.61, and it has paid cash dividends of $2.50 per share.What is your return on equity? Ignore margin interest.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
You sold short 100 shares of Kraft Heinz Co. common stock on margin at $83.55 per share.
Assume the initial margin is 50% and the maintenance margin is 30%.
One year later, the stock price closes at $59.61, and it has paid cash dividends of $2.50 per share.
What is your
Expert Solution
Step 1
Short sale price, P0 = $ 83.55
Short sale quantity, Q = 100
Proceeds from short sale, S = P0 x Q = 83.55 x 100 = $ 8,355
Step 2
Initial margin to be maintained = 50%
Money to be deposited int he account = your equity portion = 50% of proceeds from short sale = 50% x $ 8,355 = $ 4,177.50
Step 3
One year later:
- The stock price closes at $59.61 = P1, and
- it has paid cash dividends of $2.50 per share = D
Ypur net income = NI = Gain / (Loss) on short sale = (P0 - P1 - D) x N = (83.55 - 59.61 - 2.50) x 100 = $ 2,144
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