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%