Question

You are bullish on Telecom stock. The current market price is $90 per share, and you have $13,500 of your own to invest. You borrow an additional $13,500 from your broker at an interest rate of 7.8% per year and invest $27,000 in the stock.

What will be your rate of return if the price of the stock goes up by 10% during the next year? (Ignore the expected dividend.)

Please explain

Answer 1

- Current price of Stock = $90

You have $13,500 to invest and you borrow additional $13500 from your broker at an interest rate of 7.8% per year

Total Investment is made in buying Telecom Stock which is $27,000

No of shares purchase = $27,000/$90 per share = 300 shares

- Telcom Stock goes up by 10% during the next year.

Price in next year = $90*(1+10%) = $99

Total Investment worth in next year = $99*300 shares = $29,700

- Interest expenses to be paid to broker during the year = $13,500*7.8% = $1053

- Rate of return on Telecom Stock = [(Investment worth today - Initial Investment) - Interest expenses]/Initial Investment

Rate of return on Telecom Stock =[($29,700 - $27,000) - $1053]/$27000

Rate of return on Telecom Stock = 6.1%

NNote- Dividend Income is ignored

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