Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent

Question

Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent over that. You buy 600 shares of stock at $78 per share. You put up $18,000. One year later, the stock is selling for $86 per share, and you close out your position. What is your percentage rate of return assuming a dividend of $.85 per share is paid? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Suppose the call money rate is 4.5 percent, and you pay a spread of 2.5 percent over that. You buy 600 shares of stock at $78 per share. You put up $18,000. One year later, the stock is selling for $86 per share, and you close out your position. What is your percentage rate of return assuming a dividend of $.85 per share is paid? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Ans:

Amount invetsed in buying 600 shares @&78 per share= $46,800

Own contribution = $18,000

Borrowed amount =$46,800-$18,000

=$28,800

Total interest paid on borrowed money =(call money rate+ spread )percent

=4.5+2.5 =7 percent

Interest payable after one year =28,800*0.07=$2,016

Sale proceeds after one year =$86*600=$51,600

Dividend received =0.85*600=$510

Total receipt=$52,110

Amount to be returned=principal borrowed+ interest

=$28,800+$2,016=$30,816

Therefore, net excess= $52,110-$30,816=$21,294

Therefore, return percentage= 21,294/18,000=118.30 percent

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