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Essentials Of Investments
Found in: Page 81
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

On January 1, you sold short one round lot (that is, 100 shares) of Snow’s stock at $21 per share. On March 1, a dividend of $3 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $15 per share. You paid 50 cents per share in commissions for each transaction. What is the value of your account on April 1?

The value of stock = $ 300

See the step by step solution

Step by Step Solution

Step 1: Definition

The commission is the system of payment based on a specified percentage or share on the value/profit of the sale.

 Step 2: Calculation of value of accounts on April 1

The proceeds from the short sale (net of commission):

Net Proceeds = ((market price x Total number of shares) – Commission)

= ($21 x 100) – $50

= $2,050

The proceeds from the buying (net of commission):

Net Proceeds = ((market price x Total number of shares) – Commission)

= ($15 x 100) – $50

= $1,450

A dividend payment of $300 was withdrawn from the account.

Therefore, the value of your account is equal to the net proceeds of short sale – net proceeds from buying - Dividends:

$2050 – $300 – $1450 = $300

So the value of stock = $ 300

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