Question

# Assume you want to buy 100 shares of stock at \$50 per share because you feel...

Assume you want to buy 100 shares of stock at \$50 per share because you feel it will rise to \$60 within 3 months. The stock pays \$4 per share in annual dividends. You are going to buy the stock with 70% margin and will pay 8.0% interest on the margin loan.

Calculate the return if the price go up to \$55 in 3 months.

return = [(value of stock in 3 months + dividends for 3 months - loan amount - loan interest for 3 months)/investment amount] - 1

total cost of shares purchased = price per share*no. of shares purchased = \$50*100 = \$5,000

You are going to buy the stock with 70% margin means you will pay 70% of \$5,000 from your own funds and 30% you will borrow from broker.

investment amount = \$5,000*70% = \$3,500

loan amount = \$5,000*30% = \$1,500

return = [(\$55*100 + \$4/4 - \$1,500 - \$1,500*8%*3/12)/\$3,500] - 1

there are 4 quarters in a year. so, dividend for 3 months will be: annual dividend/4. annual interest rate is 8%. so interest rate for 3 months will be: 8%*3/12. 12 is the no. of months in a year.

return = [(\$5,500 + \$1 - \$1,500 - \$30)/\$3,500] - 1 = (\$3,971/\$3,500) - 1 = 1.1346 - 1 = 0.1346 or 13.46%

the return if the price go up to \$55 in 3 months is 13.46%.