Question

*Please show work and explain*

An investor bought 100 shares of Copier Corp. for $90 a share. The firm paid an annual dividend of $4 a share; the margin requirement was 60 percent with an interest rate of 8 percent on borrowed funds, and commissions on the purchase were $15 and on the sale were another $15. The price of the stock rose to $120 in one year.

What is the percentage return earned on the investment if the stock is bought on margin? Show answer in percentage terms to two places

Answer 1

Return on investment if bought on margin	(Net sale price + Dividend - Interest - Purchase price)/Net margin paid
Net purchase price	(100*90)+15
Net purchase price	$9,015
Margin amount paid	60%*((100*90)+15)
Margin amount paid	$5,409
Amount borrowed	40%*((100*90)+15)
Amount borrowed	$3,606
Interest on amount borrowed	3606*8%
Interest on amount borrowed	288.48
Dividend received	$400	4*100
Net sale price	(120*100)-15
Net sale price	$11,985
Return on investment if bought on margin	(11985+400-288.48-9015)/5409
Return on investment if bought on margin	3081.52/5409
Return on investment if bought on margin	56.97%
Thus, return on investment if bought on margin is 56.97%