Question

Problem 4-01 You purchase 110 shares for $60 a share ($6,600), and after a year the price rises to $70. Calculate the percentage return on your investment if you bought the stock on margin and the margin requirement was (ignore commissions, dividends, and interest expense): a.25 percent. Round your answer to one decimal place. % b.30 percent. Round your answer to one decimal place. % c.80 percent. Round your answer to one decimal place. %

Answer 1

Solution:-

Investment amount = $6600

Sale amount = 110*70= 7700

Profit = 7700-6600= $1100

a) Margin Requirement = 25%

Own investment = 6600*25%= $1650

Borrowed amount = $6600-1650= $4950

Profit %= Profit / own investment

Profit %= 1100/1650= 66.7%

b) Margin requirement =30%

Own investment = 6600*30%= $1980

Borrowed amount = 6600-1980= $4620

Profit %= 1100/1980= 55.5%

C) Margin requirement = 80%

Own investment = 6600*0.80= $5280

Borrowed amount = 6600-5280= $1320

Profit %= 1100/5280= 20.8%