Suppose you purchase 1,050 shares of stock at $76 per share with an initial cash

Question

Suppose you purchase 1,050 shares of stock at $76 per share with an initial cash investment of $30,000. 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 $60. Suppose instead you had simply purchased $30,000 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 $60. Suppose instead you had simply purchased $30,000 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.)

Explanation / Answer

Answer:-

Interest on loan = $49,800(1.065) - 49,800 = $3,237

Proceeds from sale = 1,050($60) = $63,000

Dollar return = $63,000 - 30,000 – 49,800 - 3,237 =- $20,037

Rate of return = -$20,037 / $30,000 = 66.79% Without margin, rate of return = ($60 - 76) / $76= 21.05%

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