Use the following information to answer the next two questions 1)Suppose you pur

Question

Use the following information to answer the next two questions

1)Suppose you purchase 1,500 shares of stock at $75 per share with an initial cash investment of $50,000. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Calculate your return on invested capital one year later if the share price is $83.

.0706

.1775

.1750

.1588

2)Suppose instead you had simply purchased $50,000 of stock with no margin. What would have been your rate of return?

.1067

.0964

.0864

.0925

Explanation / Answer

LOAN AMOUNT

= (1500 * $75) - ($50000)

= $112500 - $50000

= $62500

INTEREST ON LOAN

= $62500 * 6.5%

= $4062.50

PROCEEDS FROM SALE

= 1500 * $83

= $124500

DOLLAR RETURN

= $124500 - $50000 - $62500 - $4062.50

= $7937.50

RATE OF RETURN

= $7937.50 / $50000

= 0.1588

2./

RATE OF RETURN WITHOUT MARGIN

= ($83 - $75) / $75

= 0.1067

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.