The share price must drop below $X for the short-sale to be profitable. The objective is to calculate $X. Opportunity cost forgone must be equal to the future values of dividends paid on 30 June and 30 Sept. The future values are calculated on 31 Oct. As such, the sum of the future values is: FV = 1e(0.05×4/12) + 1e(0.05×1/12) = 2.02 Thus, $X = 20 − 2.02 = $17.98 So, as long as the share price drops below $17.98 (say it is priced at $17 ) on 31 Oct, the short sale will be profitable. Comment: Usually we should also consider the time value of money associated with the $20. Assume that after you receive the $20, you will reinvest it at the risk-free rate, then by the end of October, you will have $20e0.05×1/2 = $20.51. In this case, your share price can drop to $18.49 and still make a profit. If we do not consider the time value of money, then the assumption you will make is that you will hold the $20 cash on hand till the end of October.

A firm is expected to pay quarterly dividend of $1 per share at the end of March, June, Sept and December. Suppose that today is the beginning of May and the stock is currently priced at $20 per share. You short-sell the stock today and intend to settle the short-sale at the end of October. Assume a constant 5% p.a. continuously compounded rate of interest. Calculate the minimum value that the share price must drop at the end of October before your short-selling strategy yields a positive payoff.

The cost of a share for a company was $14$14. The share price decreased by 10%10% during the day.  Calculate the share price of the company at the end of the day.

An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain? A.$700B.$1,000C.$300D.$400

Z plc has in issue $1 shares with a market value of $2.80 per share. A dividend of 20c per share has just been paid (earnings per share were 32c). The company is able to invest so as to earn a return of 18% p.a.. Estimate the cost of equity?

A company is currently running at a loss, but A expected to report EPS of 10 cents and payout 50% of earnings as a dividend in 2 years. Once profitable, earnings and dividend will grow at 15% for 5 years (year 3-7). From year 8, growth will slow to 4%. If A’s required return is 20%. What are A shares worth today?