Question

(8) You bought 100 shares of Turki Co. stock on a 50% margin at 42 a stock. Assume that the broker charged you 8 % interest rate as well as commissions of 4.5% on both the purchase and the sale. If at year end, you received a 1.50 per share dividend and sold the stock for 53, what is your rate of return on this attractive investment?

Answer 1

Computation of Return on investment of Turki Co. Ltd

Please follow the following steps:

1. Cost of shares bought: $4200; margin money (50%) at $2100

2. Total cost: Interest @ 8% + Commission @4.5% on purchase & sales value = $595.5 (A)

3. Total Income: Profit on sale of $1100 + Dividend of $150 = $1250 (B)

4. Net profit (A-B): $654.5

5. Rate of Return: 15.6%

Turki Co. Ltd Commission @ 4.5% No of shares Buy Price $ 42 Sale Price $ 5 3 Total Cost 4200 Margin money 2100 Interest Total @ 8% On Sale Purchase Costs 168 238.5 189 595.5 100 Income Profit Total Total Dividend Income A Costs B 1100 150 1250 595.5 Net Profit (A-B) Total Investment Return on Investment 654.5 4200 15.6%