An investor buys shares in a stock. She puts up $10,000 but borrows an equal amount...

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?

Solutions

Expert Solution

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%

jeff jeffy answered 2 years ago

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