A speculator sells a stock short for $55 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $45. 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 determine the percentage return on the short position, we need to calculate the total return and then convert it to a percentage.
First, let's calculate the profit or loss on the short position by subtracting the cover price from the initial selling price:
Profit or Loss = Initial Selling Price - Cover Price = $55 - $45 = $10
Next, let's calculate the total return by adding the profit or loss to the annual cash dividend:
Total Return = Profit or Loss + Annual Cash Dividend = $10 + $2 = $12
Now, let's calculate the percentage return by dividing the total return by the initial selling price and multiplying by 100:
Percentage Return = (Total Return / Initial Selling Price) * 100 = ($12 / $55) * 100 ≈ 21.8%
Therefore, the percentage return on the short position (excluding interest and commissions) is approximately 21.8%.