Question

You’ve just opened a margin account with $25,740 at your local brokerage firm. You instruct your broker to purchase 450 shares of Landon Golf stock, which currently sells for $88 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1.25 percent over this rate. You hold the stock for four months and sell at a price of $95 per share. The company paid a dividend of $0.55 per share the day before you sold your stock.

**a.** What is your total dollar return from this
investment? **(Do not round intermediate calculations. Round
your answer to 2 decimal places.)**

**b.** What is your effective annual rate of
return? **(Do not round intermediate calculations. Enter your
answer as a percent rounded to 2 decimal places.)**

Answer #1

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**Solution**

a)

Initial purchase = 450 × $88 = $39,600

Amount borrowed = $39,600 - 25,740 = $13,860

Interest on loan = $13,860(1 + 0.0675)^1/3 - 13,860 = $305.09

Dividends received = 450($0.55) = $247.50

Proceeds from stock sale = 450($95) = $42,750

Dollar return = $42,750 + 247.50 - 25,740 - 13,860 - 305.09 =
$**3,092.41**

b)

Rate of return = $3,092.41 / $25,740 = 12.01% per 4 months

Effective annual return = (1 + 0.1201)^12/4 - 1 = **40.53%**

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