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Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the...

Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling at R20 a share. The broker charges a 10 percent annual interest rate, and commissions are 3 percent of the stock value on the purchase and sale. A year later you receive a R0.50 per share dividend and sell the stock for R27 a share. What is your rate of return on Francesca Industries?

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Expert Solution

Let assume that you buy only one share

Since this has been purchased using margin account on 55 i.e 45% has been borrowed

Commision on purchase = 20*3% = R0.6

Cost of Share = R20.6

Commison on sales = 27*3% = R0.81

Interest on borrowing= 20*45%*10% = R0.9

Dividend - R0.5

Profit = Net realised value of share (Market value - realisation cost) + Dividend - Cost of Purchase - Intrest on borrowings

Calculation of profit= (R27- R0.81)+R0.5-R20.6-R0.9

Profit = R5.19

Return = (Profit/Cost of Purchase )*100

Rate of return = (5.19/20.6)*100= 25.20%

jeff jeffy answered 2 years ago
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