Suppose you purchase 950 shares of stock at $63 per share with an initial cash i
ID: 2382395 • Letter: S
Question
Suppose you purchase 950 shares of stock at $63 per share with an initial cash investment of $20,000. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate.
Calculate your return on investment one year later if the share price is $71. Suppose instead you had simply purchased $20,000 of stock with no margin. What would your percentage rate of return have been now? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Calculate your return on investment one year later if the share price is $63. Suppose instead you had simply purchased $20,000 of stock with no margin. What would your percentage rate of return have been now? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Calculate your return on investment one year later if the share price is $47. Suppose instead you had simply purchased $20,000 of stock with no margin. What would your percentage rate of return have been now? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Total cost of 950 shares = 950 x $63 = $59,850
Personal investment = $20,000
So, Borrowed margin money = $(59,850 - 20,000) = $39,850
Interest rate on call money = 5% + 1.5% = 6.5%
Total interest on borrowed money in 1 year = $39,850 x 6.5% = $2,590.25
(1)
(a)
Total sale price = 950 x $71 = $67,450
Total profit = $(67,450 - 59,850 - 2,590.25) = $5,009.75
So, Return = $5,009.75 / $20,000 x 100 = 25.05%
(b) If I purchased stock worth $20,000
Number of shares purchased = $20,000 / $63 = 317
Sale value of 317 shares = 317 x $71 = 22,507
returns = $(22,507 - 20,000) / $20,000 = 12.54%
(2)
(a)
Total sale price = 950 x $63 = $59,850
Total profit = $(59,850 - 59,850 - 2,590.25) = - $2,590.25
So, Return = - $2,590.25 / $20,000 x 100 = - 12.95%
(b) If I purchased stock worth $20,000
Sale value of 317 shares = 317 x $63 = 20,000
returns = 0%
(3)
(a)
Total sale price = 950 x $47 = $44,650
Total profit = $(44,650 - 59,850 - 2,590.25) = - $17,790.25
So, Return = - $17,790.25 / $20,000 x 100 = - 0.44%
(b) If I purchased stock worth $20,000
Sale value of 317 shares = 317 x $47 = $14,899
returns = $(14,899 - 20,000) / $20,000 x 100 = - 25.51%
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