Ehud Katz anticipates that the price of Trinity Technology stock will go up. Its

Question

Ehud Katz anticipates that the price of Trinity Technology stock will go up. Its current price is $55.50 per share and he has $3,330 to invest. How many shares may he purchase with a cash brokerage account? How many may he purchase using a margin brokerage account with a 60% margin requirement? If the per share price is $60.20 six months later when Ehud sells the shares, what is his annual yield in each case? Assume no dividends paid and that in the case of the margin account, Ehud has no cash flows to of from the margin account except that interest for the six months reduced the funds he received by $32. The answers are 60 @ 17.65% and 100 @ 28.04%. I know how to get the number of shares, but can't I get the yield rates. Thanks.

Explanation / Answer

1) He may purchase 3330/55.5 = 60 shares 2) (3330/60%)/55.50= 100 share 3) 17.65% He made (60.2-55.5)*60 = 282 Semi annual yield =282/3330*100= 8.468% After this it has been calculated Effective Annual Yield = {(1+8.468/100)^2 }-1=17.65% 4) 28.04% He made ( 60.2 - 55.5 )*100 = 470 using the margin account. His interest expense is $32 and hence he actually made $438 and the yield is 438 * 100 / 3330 = 13.153% After this it has been calculated Effective Annual Yield = {(1+13.153/100)^2 }-1=28.04%

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