Question

Suppose you purchase 900 shares of stock at $74 per share with an initial cash investment of $33,300. 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 $82. Suppose instead you had simply purchased $33,300 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 $74. Suppose instead you had simply purchased $33,300 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

Given,

No. of shares = 900

Purchase price per share = $ 74

Initial cash investment = $ 33300

Call money rate = 5% or 0.05

Premium rate = 1.5% or 0.015

Solution :-

Purchase = No. of shares & Purchase price Per share Loan = - 900 shares & $74 = $66600 Purchase - Initial Cash investment $66600 - $ 33300 = $33300 on loan Interest - Loan X/Call money to rate Premium) rate - $33300 x ( 0.05 + 0.015) = $33300 X 0.065 = $2164.50 la) Share Price = $82, Purchased = $33300 Stock Proceeds from sale - No. of shares & Share Price - 900 shares X $82 = $ 73800

Dollar return - Proceeds - from Sale Purchased - Loan - Interest on Stock loan = $ 73800 - $33300 - $33300 – $2164.So = $ 5035.50 pate of return = Dollar return Purchased Stock $ 5035.50 $ 33300 - 0.1512 or 15.12% Price without margin, Rate of return=Share Price - Purchase Purchase price - $82 - $74 $74 $8 $74 - 0.108) or 10.81 %

(b) Share Price = $74. Purchased Stock = $33300 Proceeds from sale & No. of shares x Shase Price = 900 shares X $74= $ 66600 Dollar return - Proceeds - Purchased - Loan - Interest from Sale Stock on Loan a $66600 - $33300 - $33300 - $2164.50 --$2164.50 Rate of return - Dollar retuan. Purchased Stock - $2164.So $33300 - - 0.065 or – 6.50%.

without margin, Rate of retuon. - Share Price-Purchase Price Purchase Price $74 - $74 $74 80 - 0 % $74