Question

Please don't solve using excel. Please solve by hand or type it out.

You purchased 300 shares of common stock for $30 per share. The initial margin is 60% and the stock pays no dividend. Your rate of return on equity would be … if you sell the stock at $40 per share. The call loan rate is 5%

Answer 1

Given in the question

Purchase price=$30

Number of shares=300

Purchase value=30*300=9000

Initial margin is =60%=9000*60%=5400 (amount the investor must initially invest from own fund)

Hence the investor can borrow remaining percentage i.e. 40%=9000*40=3600

(Initial margin is the amount the investor must invest out of his own fund)

Now sale value=40

Sale value=300*40=12000

Rate of interest=5%

And interest on the loan amount=3600*5%=180

Calculation of profit

Sale price=12000

Less: Purchase price=9000

Profit=3000

Less: interest on investment=180

Net profit=2820

Now calculation of return=Net profit/Initial investment by investor

=2820/5400=52.22%