1) Ms. Susie has decided that stock of RoyalCap Inc is overvalued at $4 a share and wishes to sell it short. As the price is relatively small, short sales cannot be executed on margin, so Ms. Susie should put up complete value of stock when it is sold short.
a) Determine the percentage loss if price of the stock increases to $8?
b) Find out the percentage loss if price of the stock increases to $10?
c) Determine the percentage gain if company goes bankrupt and is dissolved?
d) Compute the maximum percentage gain short seller can earn and largest percentage loss the short seller can sustain?
e) From short seller’s perspective, prepare down the best and worst case scenarios?
2) What accurately does it mean to say that goal of the corporation is to maximize shareholder wealth? Apparently we mean maximize shareholder wealth in the manner consistent with law, but does the corporation have other stakeholders besides its shareholders? Who comes first? What does the law need?