Your rate of return on the investment is -7.5%.
Calculation:
Profit/Loss = (Sale Price - Purchase Price - Commission - Interest - Dividend) x Number of Shares
Profit/Loss = ($45 - $56 - $155 - ($45 x 0.45 x 0.08) - ($2.50 x 100)) x 100
Profit/Loss = -$1,050
Rate of Return = (Profit/Loss / Initial Investment) x 100
Rate of Return = (-$1,050 / ($56 x 100 + $155)) x 100
Rate of Return = -7.5%
You decide to sell short 100 shares of Charlotte Farms when it is selling at its yearly high of $56. Your broker tells you that your margin requirement is 45% and that the commission on the purchase is $155. While you are short the stock, Charlotte pays a $2.50 per share dividend. At the end of 1 year, you buy 100 shares of Charlotte at $45 to close out your position and are charged a commission of $145 and 8% interest on the money borrowed. What is your rate of return on the investment?
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