Question

An investor purchased 300 shares of a company at $25 per share. The stock was bought on 70 percent margin (30 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 $0.6 per share. Immediately after receiving the dividend, he sold the shares at $38 per share. The investor paid total commissions of $45 on the initial purchase and $55 on the final sale of the stock. What was the rate of return on this investment for the one-month period?

Answer 1

Total purchase amount = 300 * 25 = $7,500

As given in the question, purchase amount borrowed = 30% * 7500 = $2,250

Invested amount = 7500 - 2250 = $5,250

Interest paid = 3% per month = 3% * 2250 = $67.50

Dividend received = 0.6 * 300 = $180

Gross sale proceeds = 300 * 38 = $11,400

Total transaction expenses = 45 + 55 = $100

Net profit = sale proceeds + dividend - purchase amount - transaction expenses - interest =

11,400 + 180 - 7500 - 100 - 67.50 = $3,912.50

Rate of return on the investment for one month period = 3912.5 / 5250 = 74.52%