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 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 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

Total interest rate = 4.5%+2.5% = 7%

value of stock purchased = quantity*price = 600*78 = $46,800

amount of money put by you = 18,000. thus amount borrowed = 46800-18000 = $28,800

cost of borrowing = 7% of 28,800 = $2,016

capital gains (total) = capital gains per share*no. of shares

= (86-78)*600 = $4,800

dividend earned = 0.85*600 = $510. total returns = capital gain+dividend = 4800+410 = 5210

net return = total return - cost of borrowing = 5210 - 2016 = $3,194

return % = net return/initial investment = 3194/46800 = 6.82 %

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