Question

Question text

Calculate the euro-based return an Italian investor would have realized by investing €100,000 into a $50 American stock on margin with only 40% down and 60% borrowed. The stock pays a $0.30 quarterly dividend, and after one year the investment sells for $54 the exchange has changed from €.625 per dollar to €.6875 per dollar. The interest on the margin loan is 1% per year. The margin loan is denominated in dollars.

Select one:

a. 28.73%

b. 36.95%

c. 32.06%

d. 24.70%

Answer 1

b) 36.95%

		Total	Per share
1	Investment €	100000
2	Investment ($)	160000		(E100000/0.625)
3	Margin loan ($)	240000		($160000/0.4*0.6)
4	Total amount available	400000		(2+3)
5	No of shares	8000		(400000/50)
6	cost of shares	-400000	50	(50*8000)
7	Sale price	432000	54	(54*8000)
8	Dividend	9600	1.2	(1.2*8000)->0.3 per quarter
9	Interest on margin	-2400		(240000*1%)
10	Total profit ($)	39200		Sum(Step 6: Step 9)
11	Total cash in hand ($)	199200		(Step 10+ Step 2) Margin loan returned
12	Total cash in hand (E)	136950		step 11*0.6875
13	Profit in E	36950		Step 12-Step 1
14	Profit %	36.95		Step 13/Step 1 * 100