Question

An investor purchased 400 shares of a company at $30 per share. The stock was bought on 65 percent margin (35 percent of the purchase amount was borrowed). One month later, the investor had to pay interest on the amount borrowed at a rate of 3 percent per month. At that time, the investor received a dividend of $0.50 per share. Immediately after receiving the dividend, he sold the shares at $35 per share. The investor paid total commissions of $30 on the initial purchase and $40 on the final sale of the stock. What was the rate of return on this investment for the one-month period?

Answer #1

Purchase price = No. of shares * Price

= 400 * $ 30

= $ 12000

Own AMount @65% = $ 12000 * 65%

= $ 7800

Borrowed Amount @35% = $ 12000 * 35%

= $ 4200

Amount Invested = Own AMount + Commission Paid

= $ 7800 + $ 30

= $ 7830

Int on Borrowed amount = Borrowed mount * Int Rate

= $ 4200 * 3%

= $ 126

Sale Price = No. of shares * Price

= 400 * 35

= $ 14000

DIv Received = No. of shares * div per share

= 400 * 0.5

= $ 200

Net Proceeds = Sale Price + Div - Int - Sale Commision - Borrowed amount

= $ 14000 + $ 200 - $ 126 - $ 40 - 4200

= $ 9834

Rate of Ret = [ Net Proceeds / Initial Investment ] - 1

= [ $ 9834 / $ 7830 ] - 1

= 1.2559 - 1

**= 0.2559 i.e 25.59%**

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