You decide to sell 100 shares of Davis Industries short when it is selling at it
ID: 2798727 • Letter: Y
Question
You decide to sell 100 shares of Davis Industries short when it is selling at its yearly high of $35.Your broker tells you that your margin requirement is 55 percent and that the commission on thesale is $15. While you are short, Davis pays a $0.75 per share dividend. At the end of one year you buy your Davis shares (cover your short sale) at $30 and are charged a commission of $15and a 6 percent interest rate.
MV:100*35=3500
Margin: 55%
Your loan:3500*0.45=1575
Your equity: 3500-1575=1925
What is your dollar return on the investment?
Profit = $3500$3000$75$15$15(10.55)(3500)(0.06) = $300.50
Can someone explain where the $3000 came from in the answer for profit?
Explanation / Answer
Profit = Selling amount - Re-purchase@30 - Dividend - comission - Re-purchase commission - (1-margin) -interest
= (100*35) - (100*30) - (100*0.75) - 15 - 15 - (1-0.55)* (3500*0.06)
= 3500 - 3000 - 75 - 15 - 15 - 94.5
= $300.5
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