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An investor buys $21,000 worth of a stock priced at $30/Share using 65% initial margin
An investor buys $21,000 worth of a stock priced at $30/Share using 65% initial margin.
The broker charges 7.5% on the loan. The stock pays a $.3/share dividend. The stock was sold one year later for $33/share. What was the investors rate of return in one year?
Expert Solution
Computation of Investor's Rate of Return:
Broker's Charges per Share = Stock Price*(1-Initial Margin)*Broker Charges Rate
= $30*(1-65%)*7.5%
= $0.7875
Investor's Rate of Return = (Selling Price of Stock - Purchase Price of Stock + Dividend per Share - Broker Charges per Share)/ Investor's Share
= ($33 - $30 + $0.3 - $0.7875)/($30*65%))
= $2.5125/$19.50
Investor's Rate of Return = 12.88%
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