You’ve just opened a margin account with $27,755 at your local brokerage firm. Y
ID: 2815127 • Letter: Y
Question
You’ve just opened a margin account with $27,755 at your local brokerage firm. You instruct your broker to purchase 700 shares of Landon Golf stock, which currently sells for $61 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for three months and sell at a price of $67 per share. The company paid a dividend of $0.52 per share the day before you sold your stock.
a. What is your total dollar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
%
b. What is your effective annual rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
%
Explanation / Answer
Solution :-
Initial purchase = 700 × 61 = 42700
Amount borrowed = 42700 - 27755 = 14945
Interest on loan = 14945 (1 + 0.0675)1/4 - 14945 = 246.0534
Dividends received = 700 * (0.52) = 364
Proceeds from stock sale = 700*(67) =46900
Dollar return = 46900 + 364 - 27755 - 14945 - 246.05 = 4317.95
Rate of return = 4317.75 / 27755 = 15.55% For 3 months
Effective annual return = (1 + 0.1555)12/3 - 1 = 78.27%
Answer (a) = 4317.75
Answer (b) = 78.27%
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