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Adam purchases 1,200 shares of Beta Inc
Adam purchases 1,200 shares of Beta Inc. at $22 per share and sells them after 1 year, during which time the stock also pays a dividend. The following information is also available:
Sale price = $25
Leverage ratio = 2.5
Call money rate = 5%
Dividend = $0.20 per share
Commission = $0.03 per share
Maintenance margin = 20%
Assume that the interest on the loan and the dividend are both paid at the end of the year.
Adam’s gain attributable to leverage is closest to:
Group of answer choices
6.00%
34.09%
20.00%
Expert Solution
ANSWER:
No. of shares = 1200
Cost per share = 22
Amount of shares = 1200* 22 = 26,400
Sale Price = 25
Current Amount of share as per selling price = 1200*25 = 30,000
Gain = Current amount of share - Previous amount of share / current amount of share
= 30,000 - 26,400/ 30,000
= 3600/30,000
= 0.12
Leverage Ratio = 2.5
Hence to calculate Gain to Leverage = Leverage Ratio / Gain
= 2.5/ 0.12
= 20.83
Which is closest to the last option i.e. 20%.
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