Question

In: Finance

You purchased 100 shares of a company for $76.03, and borrowed $5,000 of the original purchase...

You purchased 100 shares of a company for $76.03, and borrowed $5,000 of the original purchase from your broker on margin. Since then, the stock price has increased by 14.6%. If your broker charges a 4.5% interest rate on margin accounts, what is your overall return?

Solutions

Expert Solution

Price of 1 share =$76.03

No. of shares purchased = 100

So, total purchase price = 100*76.03 = $7603

Out of this purchase price, $5000 is borrowed from the broker on margin.

So, own money invested in the purchase of shares = 7603 - 5000 = $2603

Interest charged on borrowed money = 4.5% or 5000*0.045 = $225

--------------------------------------------------------------------------------------------------------------------------------

Now,

The price of shares have increased by 14.6%

Price of new shares = Old price*( 1+ growth rate) = 76.03*(1+ 0.146) =$87.13

As the prices have increased, the shares are sold at $87.13 per share

Total sales achieved = 87.13*100 = $8713

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Now,

Out of total sales of $8713, the borrowed amount of $5000 is returned to the broker along with the interest of $225 charged on margin.

So, the return for the investor is 8713 - 5000 -225 = $3488 on an investment of $2603(own money)

Return on Investment = Profit/Own investment = 3488/2603 =1,34 or 134%


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