Question

An investor buys $10,000 worth of stock priced at $40 per share using 60% initial margin. The broker charges 10% on the margin loan and requires a 35% maintenance margin. The stock pays $2.00-per share dividend in 1 year, and then the stock is sold at $50 per share. What was the investors rate of return?

Answer 1

Answer)

Given

Stock sale price	= $50
Stock buying price	= $40
Dividend per share	= $2
Intial margin	= 60%
Broker charge	= 10%
Balance after initial margin	=40%(100% - 60%)

Investors rate of return = Stock sale price - Stock buying price + Dividend per share - (Balance after initial margin × Stock buying price × Broker charge) / Initial margin x Stock buying price

Investors rate of return = 50 - 40 + 2 - ( 0.4 x 40 x 0.10) / 0.60 x 40

Investors rate of return = 12 - (1.6) / 24

Investors rate of return = 10.4 / 24

Investors rate of return = 0.4333 OR 43.33%