Question

Suppose you purchase 700 shares of stock at $52 per share with an initial cash investment of $18,200. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Ignore dividends.

a. Calculate your return on investment one year later if the share price is $60. Suppose instead you had simply purchased $18,200 of stock with no margin. What would your rate of return have been now? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

b. Calculate your return on investment one year later if the share price is $52. Suppose instead you had simply purchased $18,200 of stock with no margin. What would your rate of return have been now? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

c. Calculate your return on investment one year later if the share price is $36. Suppose instead you had simply purchased $18,200 of stock with no margin. What would your rate of return have been now? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

		Margin	Not on Margin
a	Return on investment after 1 yr if share price is 60$
	Cash Investment	18200	18200
	No of Shares purchased	700	350
	Money borrowed on margin	18200	0
	Interest on borrowed money @ 6.5 (5+1.5%)	1183	0
	Value of Shares @ end of one year	60	60
	Value of Investment	42000	21000
	Money to be repaid	19383	0
	Profit	4417	2800
	% of Return	24.27%	15.38%

b		Margin	Not on Margin
	Return on investment after 1 yr if share price is 52$
	Cash Investment (a)	18200	18200
	No of Shares purchased (b)	700	350
	Money borrowed on margin ( c )	18200	0
	Interest on borrowed money @ 6.5 (5+1.5%) (i)	1183	0
	Value of Shares @ end of one year (d)	$52	$52
	Value of Investment (b*d)	36400	18200
	Money to be repaid (c + i)	19383	0
	Profit	-1183	0
	% of Return	-6.50%	0.00%

c		Margin	Not on Margin
	Return on investment after 1 yr if share price is 36$
	Cash Investment (a)	18200	18200
	No of Shares purchased (b)	700	350
	Money borrowed on margin ( c )	18200	0
	Interest on borrowed money @ 6.5 (5+1.5%) (i)	1183	0
	Value of Shares @ end of one year (d)	$36	$36
	Value of Investment (b*d)	25200	12600
	Money to be repaid (c + i)	19383	0
	Profit	-12383	-5600
	% of Return	-68.04%	-30.77%