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Case Study #1 Answers

Profits are made on short selling as the market price of a stock goes down. In this example, the stock fell to $45 per share. To determine Anne’s profit or loss, use the following calculation:

Total value of the shares at $90 * 400  $36,000 credit
Purchase cost of the shares ($45 * 400) –$18,000 purchase

This is the purchase cost to cover your borrowing of the shares

Gross Profit $18,000
Dividends   (2 x $1.50 x 400) $1,200

Since Anne sold these shares, she must pay back the dividend that the owners would have received.

This is your commission cost –$125 commissions
Net profit $16,675

This is Anne’s profit if the stock price declined from $90 to $45.

 

b. Profits are made on short selling as the market price goes down. In this example, the stock’s price went up to $250 per share. To determine Anne’s loss, use the following equation:

This is the sale of the shares at $90 (x 400) $36,000 credit
Purchase cost to cover borrowing ($250) –$100,000 purchase
Net Profit –$64,000 loss
Dividends (2 x $1.50 x 400) –$1,200 dividends

Since Anne sold these shares, she must pay back the dividend.

Commissions                                                                   –$125 commissions
Net Profit –$65,325 net profit

This is Anne’s loss if the stock price      increased from $90 to $250.

 



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