An investor purchased on margin Orange Computer for $30 a share. The stock's price subsequently increased to $50 a share at which time the investor sold the stock. If the margin requirement is 60 percent and the interest rate on borrowed funds was 7 percent, what would be the percentage earned on the investor's funds (excluding commissions)? What would have been the return if the investor had not bought the stock on margin?
PART – 1
Purchase Price of the Stock = $30
Margin requirement = $30 x 60% = $18
Borrowed Amount = $30 – 18 = $12
Percentage return when the investor used margin:
Profit on sale of sock = Sale Price – Purchase Price – Interest on Borrowing
= $50 - 30 – [ $12 x 0.07]
= $19.16
Therefore, Percentage earned on the investor's funds
= [ $19.16 / $18] x 100
= 106.4%
PART - 2
Percentage return when the investor had not bought the stock on margin
Profit on sale of stock = $50 - 30 = $20
Therefore, Percentage earned on the investor's funds
= [ $20 / 30 ] x 100
= 66.7%.
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