Question

You’ve just opened a margin account with $32,240 at your local brokerage firm. You instruct your broker to purchase 800 shares of Landon Golf stock, which currently sells for $62 per share. Suppose the call money rate is 5.5 percent and your broker charges you a spread of 1 percent over this rate. You hold the stock for six months and sell at a price of $69 per share. The company paid a dividend of $0.53 per share the day before you sold your stock.

a. What is your total dollar return from this investment?

Answer 1

a. Initial purchase = 800 × $62 = $49,600

Amount borrowed = $49,600 – $32,240 = $17,360

Interest on loan = $17,360(1 + .065)^1/2 – $17,360 = $555.32

Dividends received = 800($0.53) = $424

Proceeds from stock sale = 800($69) = $55,200

Dollar return = $55,200 + $424 – $32,240 – $17,360 – $555.32 = $5,468.68