Question

In: Finance

2. (i) Your stockbroker told you about buying stocks on margin last year. You were NOT...

2. (i) Your stockbroker told you about buying stocks on margin last year. You were NOT sure if it is a good investment decision to buy stocks on borrowed funds at the time. You decided to give using margin a try anyway. Your stockbroker bought 100 shares of ABC Corp. on margin for $65 a share. The margin requirement was 60 percent with an interest rate of 6.5 percent on borrowed funds, and commissions on the purchase and sale were 2%. One year after you invested in the stock ABC corp. paid annual dividend of $2 a share and the price of the stock rose to $110 in one year. (12 points)

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a. What is the percentage earned on the investment if the stock is bought for cash (i.e., the investor did not use margin)?

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b. What is the percentage earned on the investment if the stock is bought on margin?

Solutions

Expert Solution

Particulars a. Cash b. Margin
Purchase price              6,500.00              6,500.00
Add: brokerage                 130.00                 130.00
Total cost              6,630.00              6,630.00
Cash investment              6,630.00              3,978.00
Sale value            11,000.00            11,000.00
Dividend                 200.00                 200.00
Interest paid                          -                   172.38
Brokerage                (220.00)                (220.00)
Loan repayment                          -               (2,652.00)
Return on investment            10,980.00              8,500.38
/ investment              6,630.00              3,978.00
Percentage earned 165.61% 213.68%

jeff jeffy answered 2 years ago
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