Question

Assume you sell short 1,000 shares of common stock at $35 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $25 per share

Answer 1

57.14%

Step-by-step explanation:

Calculation for the rate of return if you repurchase the stock at $25 per share

First step is to calculate for the profit on stock

Using this formula

Profit on stock =( Sales amount of Common stock per share- Repurchased stock per share)*(Share of common stock)

Let plug in the formula

Profit on stock = ($35 - $25)(1,000)

Profit on stock=$10*10,000

Profit on stock = $10,000

Second step is to calculate for the initial investment

Using this formula

Initial investment= (Sales amount of Common stock per share*Share of common stock×Percentage of the initial margin

Let plug in the formula

Initial investment = ($35)(1,000)(.5)

Initial investment= $17,500

The rate of return will be :

Profit on stock / Initial investment

Rate of return=$10,000/$17,500

Rate of return= 57.14%

Therefore what would be your rate of return if you repurchase the stock at $25 per share will be 57.14%