Problem 2-22 Calculating Returns (CFA1) You\'ve just opened a margin account wit

Question

Problem 2-22 Calculating Returns (CFA1) You've just opened a margin account with $13,475 at your local brokerage firm. You instruct your broker to purchase 550 shares of Landon Golf stock, which currently sells for $49 per share. Suppose the call money rate is 6 percent and your broker dividend of $0.28 per share the day before you sold your stock a. What is your total dolar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal spread of 1,25 percent over this rate. You hold the stock for three months and sell at a price of $56 per share. The company pald a places.) return b. What is your effective annual rate of return? (Do not round intermediate calculatiohs. Enter your answer as a percent rounded to 2 decimal places) Effective annual return

Explanation / Answer

Amount in Margin Account=$13,475

Cost of shares=550*$49=$26,950

Amount of Loan=(26950-13475)=$13,475

Interest Rate=6+1.25=7.25%=0.0725

Interest for three months=0.0725*(3/12)=0.018125

Amount to be paid to broker with interest=13475*(1+0.018125)=$13,719

Amount of dividend received=0.28*550=$154

Amount received from Sale of shares=550*$56=$30,800

Total amount received=30800+154=$30,954

Less:Amount paid tobroker withinterest=$13,719

Net amount available=(30954-13719)=$17,235

Amount of initial investment=$13,475

Total dollar return from this investment=(17235-13475)=$3,760

Effective annual rate of return:

Quarterly return=(3760/13475)=0.27901786=27.9%

Effective annual return =((1+0.27901786)^4)-1=1.67612523=167.6%

Total   dollar return $          3,760

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