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An investor buys 300 shares of stock selling at $65 per share using a margin of 70%
An investor buys 300 shares of stock selling at $65 per share using a margin of 70%. The stock pays annual dividends of $2 per share. A margin loan can be obtained at an annual interest cost of 4%. Determine what return on invested capital the investor will realize if the price of the stock increases to $84 within six months. What is the annualized rate of return on this transaction?
Expert Solution
Loan Amount = 65* 300* (1- Margin)
= 19500* (1- 70%)
= 5850
Margin Amount = 19500* 70%
= 13650
Interest Paid half yearly= Loan * Annual interest/2
= 5850* 4%/2
=117
Rise in price of stock = 84 *300
= 25200
Dividend half yearly = 2* 300/ 2
= 300
Six month Return % = ( New Stock Value - Initial Stock Value - Interest + Dividend )/Margin amount
= (25200- 19500- 117 +300)/ 13650
= 43.10%
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