You’ve just opened a margin account with $18,000 at your local brokerage firm. Y
ID: 2740890 • Letter: Y
Question
You’ve just opened a margin account with $18,000 at your local brokerage firm. You instruct your broker to purchase 650 shares of Landon Golf stock, which currently sells for $55 per share. Suppose the call money rate is 5 percent and your broker charges you a spread of 1 percent over this rate. You hold the stock for 6 months and sell at a price of $62 per share. The company paid a dividend of $0.62 per share the day before you sold your stock. 1. What is your total dollar return from this investment? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Dollar return $
What is your effective annual rate of return? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Effective annual return %
Explanation / Answer
Particulars Amount($) Total Cost Of share purchased 650*55 A 35750 Margin With Broker B 18000 Short term Finance Required(A-B) 17750 Short term loan reapyment after 3 month ie month of sales =17750*((1+(0.05+0.01)*6/12)) 18282.5 Gross Proceed from sale of share = 650*62 A 40300 Dividend received .62*650 B 403 Total receipts from investment A+b 40703 Net Proceeds after Repayment of LOAN +40703-18282.5 22420.5 less margin Money 18000 Total Dollar Return 4420.5 Effective annual rate of return (4420.5/18000)*12months/6months 49.12%
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