Question

In: Finance

Part 1: On January 1, you sold short one round lot (that is, 100 shares) of...

Part 1:

On January 1, you sold short one round lot (that is, 100 shares) of Lowe's stock at $29.00 per share. On March 1, a dividend of $2.10 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $24.50 per share. You paid 50 cents per share in commissions for each transaction.

a. What is the proceeds from the short sale (net of commission)?

b. What is the dividend payment?

c. What is the total cost, including commission, if you have to cover the short sale by buying the stock at a price of $24.50 per share?

d. What is the net gain from your transaction?

Part 2:

The Arizona Stock Exchange lists a bid price of 1.24 and an ask price of 1.45 for Kicking Bird Energy Corporation.

a. At what price can you buy the stock? (Round your answer to 2 decimal places.)

b. What is the dealer’s bid-ask spread? (Round your answer to 2 decimal places.)

Solutions

Expert Solution

Part 1.

a. proceeds from Short Sale

Sale Price = $29

Less Commission = $(0.5)

Net Selling Price = ($28.50)

No. of Shars = 100

Proceeds from Sale (100*28.5) = $2850.

b. Dividend Payment

Total Dividend payment ($2.10 * 100) $210

C. Cost of Buying the Shares to cover short Sales

Cost Price = $ 24.50

Add Commission = $0.50

Total Price = $25.00

No. of Shares = 100

Total Cost Price (25*100) = $ 2,500  

d. Net Gain From Transactions

Sale Proceeds = $2,850

Less Dividend = $(210)

Less Cost of Purchase = $ (2,500)

Net Gain = $ 140.

However under Tax Computation in Schedule A (Form 1040) this dividend expense not deductible as short selling is of less than 45 days and net gain would be $ 350 (140+210).

Part 2.

a. Ask price is the price where Authorised seller intend to sell the stock. Hence at that price the buyer can buy the stock. So we can buy the Stock of Kicking Bird Energy Corporation at Ask price of 1,45.

b. Bid-Ask spread is the margin that the dealer earn by selling at higher price (Ask Price) and buying at lower price (Bid Price).

The Bid Ask spread is difference between ask price and bid price.

In case of Kicking Bird Energy Corporation the Bid Ask Spread is 0.21 (1.45-1,24).

Please always give feedback of anwer.

jeff jeffy answered 2 years ago
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