A speculator sells a stock short for $70 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $60. What is the percentage return on the position (excluding the impact of any interest expense and commissions)? Round your answer to one decimal places.
To calculate the percentage return on the short position, we need to consider the dividend and the difference between the initial sale price and the cover price.
First, let's calculate the dividend received per share over the year. Since the annual cash dividend is $2, we divide it by the sale price of $70 to find the dividend yield: $2 / $70 = 0.0286.
Next, let's calculate the difference between the initial sale price and the cover price. The initial sale price is $70, and the cover price is $60. Therefore, the difference is $70 - $60 = $10.
Now, we can calculate the total return per share by adding the dividend yield to the difference in share price: 0.0286 + 10 = 10.0286.
Finally, to calculate the percentage return on the short position, we divide the total return per share by the initial sale price and multiply by 100: (10.0286 / 70) * 100 = 14.326.
Therefore, the percentage return on the short position is approximately 14.3%.