stephen sold short 1,000 shares of smt inc. at $45 a share. he closed the position when smt was trading at…

stephen sold short 1,000 shares of smt inc. at $45 a share. he closed the position when smt was trading at $35 a share. while he held the short position, a dividend was paid by smt of $1.50 per share. what was stephens total pre - tax profit or loss? 1) $8,500 profit. 2) $10,000 loss. 3) $10,000 profit. 4) $11,500 loss.

stephen sold short 1,000 shares of smt inc. at $45 a share. he closed the position when smt was trading at $35 a share. while he held the short position, a dividend was paid by smt of $1.50 per share. what was stephens total pre - tax profit or loss? 1) $8,500 profit. 2) $10,000 loss. 3) $10,000 profit. 4) $11,500 loss.

Answer

Explanation:

Step1: Calculate the gain from price change

The gain from price change per share is (45 - 35=$10). For 1000 shares, the gain from price change is (1000\times10=$10000).

Step2: Calculate the dividend payment

The dividend per share is ($1.50). For 1000 shares, the dividend payment is (1000\times1.50 = $1500). Since Stephen is short - selling, he has to pay the dividend.

Step3: Calculate the total pre - tax profit

The total pre - tax profit (P=(45 - 35)\times1000-1.5\times1000) [ \begin{align*} P&=10\times1000-1.5\times1000\ &=(10 - 1.5)\times1000\ &=8.5\times1000\ &=$8500 \end{align*} ]

Answer:

  1. ($8,500) profit.