Question

An investor buys 200 shares of stock selling at $66 per share using a margin of 74%. The stock pays annual dividends of $3.00 per share. A margin loan can be obtained at an annual interest cost of 8.9%. Determine what return on invested capital the investor will realize if the price of the stock increases to $108 within six months. What is the annualized rate of return on this transaction? If the price of the stock increases to $108 within six months, the six-month return on this transaction is 88.63%. (Round to two decimal places.) The annualized rate of retum on this transaction is 4.92%. (Round to two decimal places.)

Answer 1

Given,

No. of shares = 200 shares

Price per share = $ 66

Margin = 74%

Dividends per share = $ 3

Interest rate = 8.9%

Price per share at sale = $ 108

Period = 6 months

Solution :-

market value of securities at Purchas (MVp) - No. of shares & price per share 2 200 Shades x $66 = $13700 market value of securities at sale (MVs) = No. of shares & price per shave at sale = 200 shares X $108 = $21600 Dividend income D - No. of shares & Dividends per share x 6 - 200 shares & $3 x 6 = $ 600 x 6 = $300 Equity investment - MUp & margin = $13200 x 74% = 89768 margin Loan = MUp - Equity Investment

= $13200 - $9768 = $3432 Interest paid on loan (I) = margin doan x interest rate x 6 - $3432 x 8.9% X. - $305.448 x 6 = $ 152.724 Now, Return on invested Capital - D- I + MVS - MUP Equity Investment $300 - $152.724 +$21600 - $13200 $9768 $8547.276 $9768 = 0.8750 or 87.50%. This is for the six-month period.

Annualized rate of return = Six-month retuon x 2 87.50% X 2 = 175 %