Question

14- Jeff bought 100 shares of stock for $30.00 per share on 70% margin. Assume Jeff...

14- Jeff bought 100 shares of stock for $30.00 per share on 70% margin. Assume Jeff holds the stock for one year and that his interest costs will be $45 over the holding period. Jeff also received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage return on invested capital if he sells the stock for $34 a share?

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Answer #1

Total amount of shares bought by jeff = $30.00 * 100 = $3000.00

Invested capital = 70% margin of $3000.00 = 0.70 * $3000.00 = $2100.00

The return generated = Profit from selling the stock (Selling Price - Buying Price)  + Dividend Earned during the year - interest costs for the period

=  ($34 - $30) *100 + $0.30 * 100 (Number of Shares) - $45

= 4 * 100 + 30 - 45 = 400 +30 - 45 = $385

Percentage return on invested capital = Return generated / Invested capital = $385 / $2100.00 = 18.33%

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