Question

Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling at R20 a share. The broker charges a 10 percent annual interest rate, and commissions are 3 percent of the stock value on the purchase and sale. A year later you receive a R0.50 per share dividend and sell the stock for R27 a share. What is your rate of return on Francesca Industries?

Answer 1

Answer :-

Profit = Sale Value - Purchase Value + Dividend - Transaction Cost - Interest

Purchase Value of Investment = $20 x 100 shares = $2,000 (Since Round Lot is of 100 shares )

Your Investment = margin requirement + commission.

= (.55 x $2,000) + (.03 x $2,000)

= $1,100 + $60

= $1,160

Selling Value of Investment = $27 x 100 shares

= $2,700

Dividends = $.50 x 100 shares = $50.00

Transaction Cost( Commission ) = (.03 x $2,000) + (.03 x $2,700)

= $60 + $81

= $141

Interest = .10 x (.45 x $2,000) = $90.00

Therefore:

Profit = $2,700 - $2,000 + $50 - $141 - $90

= $519

The rate of return on your investment of $1,160 is:

$519/$1,160 = 44.74%