You’ve just opened a margin account with $14,000 at your local brokerage firm. Y

Question

You’ve just opened a margin account with $14,000 at your local brokerage firm. You instruct your broker to purchase 700 shares of Landon Golf stock, which currently sells for $61 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for 6 months and sell at a price of $67 per share. The company paid a dividend of $0.52 per share the day before you sold your stock.

What is your total dollar return from this investment? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

What is your effective annual rate of return? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

You’ve just opened a margin account with $14,000 at your local brokerage firm. You instruct your broker to purchase 700 shares of Landon Golf stock, which currently sells for $61 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for 6 months and sell at a price of $67 per share. The company paid a dividend of $0.52 per share the day before you sold your stock.

Explanation / Answer

1. What is your total dollar return from this investment?

In this question brocker cant purchase 700 shares of Landon Golf stock on behalf of me because I just opened a margin account with $14,000 with local brokerage firm thats why i can purchase only worth of $28,000 value of share..

so broker purchase only ($28000 / $61 ) 459share.

cost of stock :-

stock value = $459 * $61 =$ 28,000

intrest on borrowed money = $14,000 * $5.5% * 6/12 = $385

Brokrege charge    = $28,000 * 1.25% = $350

Total cost                          = $28,000+$385+$350 = $28,735.

Revenue genration from investment :-

Sale of stock = 459 * $65 = $29,835

Dividend on stock = 459 * $0.52 = $238.68

brokrege paid       = $29,835 * 1.25% = $372.93

Net revenue = $29,835+$238.68-$372.93 = $29,700

Return from this investment = $29,700 - $28,735 = $965

*We assume borrowed amount pay in last of 6th month.

2. What is your effective annual rate of return?

Annual rate of return = Estimated averege net annual income / initial investment * 100

                                 $965/2) $482.50 / $28,735 * 100 = 1.68% Ans.

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