Problem 2-22 You’ve just opened a margin account with $13,000 at your local brok

Question

Problem 2-22 You’ve just opened a margin account with $13,000 at your local brokerage firm. You instruct your broker to purchase 600 shares of Landon Golf stock, which currently sells for $82 per share. Suppose the call money rate is 7 percent and your broker charges you a spread of 1 percent over this rate. You hold the stock for 4 months and sell at a price of $90 per share. The company paid a dividend of $.44 per share the day before you sold your stock. 1. What is your total dollar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Dollar return $ 2. What is your effective annual rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Effective annual return %

Explanation / Answer

Total cost of stock: 82 * 600 = $49,200 typically you have a 50% margin, but you don't mention the margin requirement so I'll assume your cash in is the $13,000. That means... 49,200 - 13,000 = $36,200 is financed in 4 months you will owe 36,200 * [1 +(0.07 + 0.01)4/12] = $37,165.33 Gross Proceed at sale: 600 * $90 = 54,000 + dividend: 0.44 * 600 = 264 Total Gross: $54,264 repay the loan: 54,264 - 37,165.33 = net proceeds: 17,098.67 subtract your original $13k investment = 4,098.67

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