Question

Suppose that you opened a margin account (margin requirement = 60%) with your brokerage firm. Through this account, you invested in 100 shares of Mercer Inc. stocks at $80 per share two years ago. While you hold the stocks (2 years = 8 quarters), the firm paid out $1.00 dividend per share every quarter. If you sell the stocks at $90 per share today, what is the percentage return for your investment? Assume that the commission rate is 5 percent of the purchase and sale price, and you need to pay 10% interest compounding on the borrowed fund every year.

Answer 1

ANSWER:-

Profit = Ending Value - Beginning Value + Dividends - Transaction Costs - Interest

Beginning Value of Investment = $80 x 100 shares = $8,000

Your Investment = margin requirement + commission.

= (.60 x $8,000) + (.05 x $8,000) = $4,800 + $400 = $5,200

Ending Value of Investment = $90 x 100 shares = $9,000

Dividends = $1 x 8 x 100 shares = $800

Transaction Costs = (.05 x $8,000) + (.05 x $9,000) = $400 + $450 = $850

Interest = .10 x (.40 x $8,000) x 2 = $640.00

Therefore:

Profit = $9,000 - $8,000 + $800 - $850 - $640 = $310

The rate of return on your investment of $5,200 is:

$310/$5,200 = 5.96%