Question

eBook

Problem 3-03

Suppose you buy a round lot of Francesca Industries stock (100 shares) on 60 percent margin when the stock is selling at $20 a share. The broker charges a 13 percent annual interest rate, and commissions are 3 percent of the stock value on the purchase and sale. A year later you receive a $0.60 per share dividend and sell the stock for $32 a share. What is your rate of return on Francesca Industries? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Value of stock= 100 Shares * 20 = 2000

Initial Margin = 2000* 60% = 1200

Commission on Purchase = 2000 * 3% = 60

Interest Charged For one year = 2000 * 40% * 13% = 104

Commision on Sales = 100 Shares * 32 * 3% = 96

Dividend Received = 100 Shares * .60 = 60

Increment in Price Profit = 100 Shares * (32 - 20) = 1200

Net Income on Sale = Dividend + Increment in Price - Commission on Sale - Interest = 60 + 1200 - 96 -104= 1060

Net Investment = Initial Margin + Commision on Purchase = 1200 + 60= 1260

Now Rate of Return =1060/1260

84.13℅