USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 52

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You sell 100 shares short of AMF Corporation when it is selling at $45 per share. Your margin requirement is 60 percent and the commission on the sale is $50 and the broker charges 10 percent annual interest. AMF Corporation paid a $0.50 per share dividend while you were short the stock. After one year, you cover your short sale at $35 per share with a $50 commission for the purchase.
-Refer to Exhibit 3.8. What is your annual rate of return on this investment?

• A) 18 percent
• B) 24 percent
• C) 25 percent
• D) 36 percent
• E) 37 percent

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Definitions:

Market Price

The current value at which a good or service can be bought or sold in a given market.

Short-Run Equilibrium

A state in which supply equals demand within a particular market, specifically under the assumption that some conditions (like input prices) are fixed in the short term.

Marginal Cost

The charge for the production of one more unit of a product or service.

Marginal Revenue

The enhanced earnings a firm receives from offloading an extra unit of a good or service.