An investor purchased 2000 shares of stock of a company for GHs5 per share with

Question

An investor purchased 2000 shares of stock of a company for GHs5 per share with a brokerage commission of 2.5% on the value of the stock. Since the investor's equity of GHs 6000 was not enough to pay for the total investment, the broker provided the remainder of the needed funds as loans with interest rate at 15% per annum. In the course of the year, the company paid a dividend of Ghs 1 per share. If the investor sold the shares at the end of exactly one year for Ghs 6 per share, calculate the,

i) return on equity of the investor

ii) return on the investment

Explanation / Answer

1). Return on equity of investor = (Income - Cost of interest + capital gain)/ Shareholders equity*100

= [Ghs1*2,000shares - Ghs4,250*15% + 2,000shares*(6-5)]/(Ghs 10,000 +Ghs10,000*2.5%)*100

= Ghs 3,362.50/ Ghs10,250*100

= 32.80%

2). Return on Investment = (Dividend + capital gain)/Cost of investment*100

= [Ghs 1*2,000 shares + 2,000 shares*(6-5)]/(Ghs5*2,000 - Ghs10,000*2.5%)

= Ghs 4,000/Ghs 10,250*100

= 41.03%

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