Question

Suppose you buy a round lot of Francesca Industries stock (100 shares) on 55 percent margin when the stock is selling at $30 a share. The broker charges a 12 percent annual interest rate, and commissions are 2 percent of the stock value on the purchase and sale. A year later you receive a $0.65 per share dividend and sell the stock for $41 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

Stock value is = (100*30) = $ 3,000/. |

Initial margin is = (3000*55%) = $ 1,650/. |

Commission on purchase is = (3000*2%) = $ 60/. |

Interest Charged For one year = (3000*45%*12%) = $ 162/. |

Commision on Sales = (100*41*2%) = $ 82/. |

Dividend Received = (100*0.65) = $ 65/. |

Increment in Price Profit is = (100*(41-30)) = $ 1,100/. |

Net Income on Sale = Dividend + Increment in Price - Commission on Sale - Interest |

Net Income on Sale = (65+1100-82-162) |

Net Income on Sale = $ 921/. |

Net Investment = Initial Margin + Commision on Purchase |

Net Investment = (1650+60) = $ 1,710/. |

Rate of Return is = (921/1710)*100 |

Rate of Return is = 53.86% (Rounded off) |

eBook
Problem 3-03
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