Question

An investor buys $24 thousand dollars of stock at $20 per share, using 70% initial margin. The broker charges 5.4% APR compounded daily on the loan, and requires a 35% maintenance margin. The stock pays $0.64 per share dividend each year. If the stock is sold at the end of the year at $24 per share, what is the investor's rate of return?

Answer 1

Number of shares bought = Total Share value purchased / Price per share

Number of shares bought = 24,000 / 20

Number of shares bought = 1200

Value of stock in 1 year = Share Price Sold* Number of Shares

Value of stock in 1 year = 24*1200

Value of stock in 1 year = 28,800

Dividends Received = Dividend Per Share * Number of Shares

Dividends Received = .64*1200 = 768

Initial Margin = Initial Margin % * Share Value purchased

Initial Margin = 70%*24,000

Initial Margin = 16,800

Loan = (1-Initial Margin) * Total Share Value bought

Loan = (1-70%) * 24,000

Loan = 7200

Interest Due = Loan * Interest Charged by broker

Interest Due = 7200*5.4%

Interest Due = 388.8

Ending Account Balance = Value of stock at year 1 + Dividends received - loan - Interest Due

Ending Account Balance = 28,800+768-7200-388.8

Ending Account Balance = 21,979.2

Rate of Return = (Ending Balance - Initial Margin ) / Initial Margin

Rate of Return = (21,979.2-16800) / 16800

Rate of Return = 30.82%