6. Assume that Michaela purchases $12,000 worth of a stock. To do so she uses $2

Question

6. Assume that Michaela purchases $12,000 worth of a stock. To do so she uses $2,000 of her own money and borrows the remaining $10,000 at an 8.0% interest rate. If the stock's value increases by 20% in one year and she sells the stock at that time, what is her rate of return? a. 13% b. 16% c. 20% d. 80% 7. Assume that Sharon purchases $5,000 worth of a stock.To do so she uses $1,000 of her own money and borrows the remaining $4,000 at a 7.0% interest rate. If the stock's value decreases by 10% in one year and she has to sell the stock at that time, what is her rate of return? a. -10% b. -50% -78% -156% c. d. ton adds to

Explanation / Answer

Answer 1 Initial Investment= 2000 cost of borrowing= 8%of 10000 cost of borrowing= 800 Value of stock after 1 year= 12000+12000*20% Value of stock after 1 year= 14400 Total increase in stock value= value of stock after 1 year-cost of borrowing-Initial value Total increase in stock value= 14400-800-12000 Total increase in stock value= 1600 Rate of return= Total Increase in value/Initial Investment Rate of return= 1600/2000 Rate of return= 80% Correct answer is D Answer 2 Initial Investment= 1000 cost of borrowing= 7%of 4000 cost of borrowing= 280 Value of stock after 1 year= 5000-5000*10% Value of stock after 1 year= 4500 Total increase in stock value= value of stock after 1 year-cost of borrowing-Initial value Total increase in stock value= 4500-280-5000 Total increase in stock value= -780 Rate of return= Total Increase in value/Initial Investment Rate of return= -0.78 Rate of return= -78% Correct answer is C

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