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You purchased 100 shares of Express Scripts common stock on margin at $70.38 per share. Assume...

You purchased 100 shares of Express Scripts common stock on margin at $70.38 per share. Assume the initial margin is 50% and the maintenance margin is 30%. One year later, the stock price closes at $71.75. If the broker’s call loan rate is 2.00%, what is your return on equity?

Can I please get a step by step breakdown so that I can better understand the process involved? Thank you.

Expert Solution

Number of share = 100

Price per share = $70.38

Total value of investment = $70.38 × 100

= $7,038

Initial margin = 50%

Percent of investment borrowed = 50%

Total value of own fund invested = $7,038 × 50%

= $3,519

Loan = $3,519

Interest rate on loan = 2%

Value of loan plus interest in one year = $3,519 × (1 + 2%)

= $3,589.38.

Total amount need to pay after one year is $3,589.38.

Stock price goes up $71.75.

Value of investment after one year = $71.75 × 100

= $7,175.

Value of equity after repayment of debt = $7,175 - $3,589.38

= $$3,585.62.

Return on equity = ($3,582.62 - $3,519) / $3,519

= $66,62 / $3,519

= 1.89%

Return on equity is 1.89%.

jeff jeffy answered 2 years ago

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