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getsetgo, MBA
Category: Homework
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Experience:  MBA from IIM Calcutta, Engineer, 8+ years of exp. at executive level
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Ms. Tejal Gandhi has decided that the stock of SmallCap Inc

Resolved Question:

Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms. Gandhi must put up the entire value of the stock when it is sold short. Please show all work, if any.
a) What is the percentage loss if the price of the stock rises to $8?
b) What is the percentage loss if the price rises to $10?
c) What is the percentage gain if the company goes bankrupt and is dissolved?
d) What are the maximum percentage gain the short seller can earn and the largest percentage loss the short sell can sustain?
e) From the short seller’s perspective, what are the best and worst case scenarios?
Submitted: 4 years ago.
Category: Homework
Expert:  getsetgo replied 4 years ago.

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