Suppose you purchase 850 shares of stock at $54 per share with an initial cash i

Question

Suppose you purchase 850 shares of stock at $54 per share with an initial cash investment of $14,000. 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 $62. Suppose instead you had simply purchased $14,000 of stock with no margin. What would your 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 $54. Suppose instead you had simply purchased $14,000 of stock with no margin. What would your 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 $38. Suppose instead you had simply purchased $14,000 of stock with no margin. What would your 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.)

Suppose you purchase 850 shares of stock at $54 per share with an initial cash investment of $14,000. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate.

Explanation / Answer

a.

Cost of purchase = 850 shares × $54 = $45,900

Cost of sales = 850 shares × $62 = $52,700

Goss benefit from purchase and sales = $52,700 - $45,900 = $6,800

Broker’s charge = $45,900 × (5 + 1.5) % = $2,983.5

Net benefit after deducting broker’s charge = $6,800 - $2,983.5 = $3,816.5

Initial payment = $14,000

Rate of return = (Net benefit / Initial payment) × 100

                        = ($3,816.5 / $14,000) × 100

                        = 27.26 %

Without margin, rate of return = (Gross benefit / Initial payment) × 100

                                                = ($6,800 / $14,000) × 100

                                                = 48.57 %

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