Question

Assume that Sharon purchases $5,000 worth of a stock. To do so she uses $1,000 of her own money and borrows the remaining $4,000 at a 7.0% interest rate. If the stock's value decreases by 10% in one year and she has to sell the stock at that time, what is her rate of return?

Answer 1

Rate of return = -78%

Step-by-step explanation:

given data

purchases = $5,000

uses = $1,000

remaining = $4,000

interest rate = 7%

stock's value decreases = 10%

solution

we know here cost of borrowing will be with 7 % is

cost of borrowing = 7% of 4,000

cost of borrowing = 280

so

Value of stock after 1 year = 5000 - 5000 × 10%

Value of stock after 1 year = 4500

and

total increase in stock value = value of stock after 1 year - cost of borrowing - Initial value .....................1

put here value we get

Total increase in stock value = 4500 - 280 - 5000

Total increase in stock value = -780

and

Rate of return will be here

Rate of return =
`(Total Increase in value)/(Initial Investment)` ....2

put here value

Rate of return =
`(-780)/(1000)`

Rate of return = -0.78

Rate of return = -78%