Question

X Company's stock is selling for $10 and you've decided to purchase as many shares as you possibly can. You have $30,000 available to invest. The initial margin requirement on your account is 60 percent and the maintenance margin is 35 percent. The call money rate is 5.6 percent and you pay 1.3 percent above that rate. You hold the stock for 7 months and sell at a price of $12 per share. The company paid a dividend of $.51 per share the day before you sold your stock. a Please show the T-accounts before and after the price change b. What is your effective annual rate of retum?

Answer 1

Current market price = 10

Amount avaliabile = 30,000

initial margin requirement = 60%

=> 30000 = 60% of total investment

=> total investment = 30000/0.6 = 50,000

maintenance margin = 35%

interest rate on loan = 5.6 + 1.3 = 6.9%

Selling Price = 12

Dividend = 0.51

a.

Total purchase done of amount = 50000

Total number of stocks = 50000/10 = 5000

Initial balance = 30,000

Final balance = (initial margin + (Final price - Begining Price)*number of stocks) = (30000 + (12 -10)*5000) = 40,000

b.

Annual Return =(initial margin + (Final price - Begining Price)*number of stocks - Interest + Dividend recived)/(number of stocks*final price)

Loan amount = 20000

Interest paid for 7 months with @6.9% p.a. = 20000*(1+0.069/12)^7 = 20819.02

Dividend paid = 5000*0.51 = 2550

Annaul return = (30000 + (12 -10)*5000 - 20819.02 + 2550)/(5000*12) = 36.2183%