After hours of research and analysis, you decide that Whittier Plastics is a failing company. The stock is currently trading at $50 per share, but you are confident that the share price will decrease quickly by the end of the month.

In order to capitalize on the predicted decline, you decide to short sell shares of Whittier Plastics. Since you have an existing margin account with Morgan Stanley, you contact your broker and put in an order to short 400 shares. The broker borrows the shares from the margin account of one of the firms clients. The broker sells the shares in the open market and the proceeds of the sales are put in your margin account.

In the coming months, one of two things can happen:

1. Assume the share price of Whittier Plastics drops to $30. Complete the following table.

(5 points)

Borrowed 400 shares of Whittier Plastics at $50/share = _______________

Bought back 400 shares of Whittier Plastics at $30/share = _______________

Your Profit/Loss = _______________

2. Assume the share price of Whittier Plastics rises to $100. Complete the following table.

(5 points)

Borrowed 400 shares of Whittier Plastics at $50/share = _______________

Bought back 400 shares of Whittier Plastics at $100/share = _______________

Your Profit/Loss = _______________

3. You buy one Microsoft (MSFT) call with the stock at $265 and you pay $2. MSFT increases to $285. Hint: Refer to Options In-Class Solutions Problem #1 solutions posted at the bottom of Module 6 for help with the calculations. (10 points)

What was the net dollar gain of your option? __________ (4 points)

What is the percentage gain of your option? _______ (4 points)

What was the percentage increase in the stock price? __________ (2 points)

4. EK Enterprises has 3 million shares of $8 par value common stock issued and outstanding which is currently trading at $120 per share. The management believes that the share price is too high and it intends to reduce it to its 1/4 of its current share price. (10 points)

The company would need to issue a ______-for-1 stock split which means that for each of currently issued common shares the company shall issue ______ shares. It will increase the total number of shares issued and outstanding to ______ million (______ million _____) resulting in a par value of $_______ ($_____ ____) and a market price of $_________ ($_____ _____).