In: Finance
An investor buys shares in a stock. She puts up $10,000 but borrows an equal amount
of money from her broker to double the amount invested to $20,000. The stock costs
$10 per share when she purchases it. In one year the investor sells all her shares of
the stock for $8 per share. The broker charged 5% (per year) on the loan. Also, right
before the investor sold her shares, the stock paid a dividend of $2.25 per share. What
was her holding-period rate of return?
Solution:
Total dividend received=$2.25*($20,000/$10)
=$4500
Loss on sale of share=[Purchase Price-Sale Price]*No. of shares
=[$10-$8]*200
=$4000
Interest on loan=$10,000*5%
=$500
HPR=Total dividend received-Loss on sale of share-Interest on loan/Amount invested
=[$4500-$4000-$500]/$10,000
=$0/10,000
= 0%