Question

Suppose you purchase 80 shares of Eagle inc. at a price of $85.68 per share using 50% margin. Your annual interest rate is 8%. After 4 months, Eagle inc. is now at a price of $122 per share, and has paid one dividend of $1 per share. What is your 4-month return on this margin purchase? Assume you pay 4/12 of the annual interest.

Answer 1

Total initial own investment= (80*85.68)*50%=3427.2

Cost of borrowing= (3427.2)*8%*4/12=18.2784

Total rate of return on investment= (selling price- purchasing price-cost of borrowing+dividend paid)/initial own investment

= (9760-6854.4-18.27+80)/3427)

= 86.58%

Overall rate of return generated by investor is 86.5 8%