Question

You’ve just opened a margin account with $20,000 at your local brokerage firm. You instruct your broker to purchase 500 shares of Landon Golf stock, which currently sells for $60 per share. Suppose the call money rate is 5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for six months and sell at a price of $65 per share. The company paid a dividend of $.25 per share the day before you sold your stock.

What is the Dollar Return?

What is the effective annual Return?

Answer 1

Dollar return = $2317.24

Effective annual return = 24.52%

Explanation:

Initial purchase price = 500 × $60 = $30000

Borrowed amount ($30000 - $20000) = $10000

Interest on borrowed amount $10000(1 + 0.0625)^1/2 - $10000 = $307.76

Received dividends (500 shares * $0.25) = $125

Proceeds from sale of shares (500 * $65) = $32500

Now, let’s calculate dollar return;

Dollar return = (Sale price + Dividends – purchase price – interest)

Dollar return = $32500 + $125 - $30000 - $307.76 = $2317.24

Rate of return = $2317.24 / $20000 = 11.59%

Effective annual return = (1 + 0.1159)^12/6 - 1 = 24.52%