Question

16. Suppose the call money rate is 6,8 percent, and you pay a spread of 1.9 percent that. You buy 600 shares at S44 per share with an initial margin of 25 percent. One year later, the stock is selling for $52 per share, and you close out your position. What is your return assuming no dividends are paid? A. 26.63% B. 46.63% C. 18.18% D. 8.70% E. None of the above.

please show your work :)

Answer 1

Rate of return = dollars return / initial equity

Answer is B. 46.63%

Initial equity= number of shares × share price × initial margin= 600× 44× 25%=26400×.25= 6600

Amount borrowed= number of shares × share price × (1- initial margin) = 600×44 (1-25%)= 600× 44× (1-.25)= 26400×.75= 19800

Interest= amount borrowed × (call Money + spread)

Interest= 19800× (.068+.019)= 19800× 0.087=1722.6

Proceeds from sale= number of shares× stock selling price= 600× 52= 31200

Dollars return=sale proceeds- amount borrowed- interest - initial equity=31200-19800-1722.6-6600= 3077.4

Rate of return= dollars return / initial equity= 3077.4/6600= 46.63%