Question

You are bullish on Telecom stock. The current market price is $100 per share, and you have $15,000 of your own to invest. You borrow an additional $15,000 from your broker at an interest rate of 6.0% per year and invest $30,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 8% during the next year? (Ignore the expected dividend.) (Round your answer to 2 decimal places.)

Answer 1

10%

Step-by-step explanation:

Value of investment in the beginning = $30,000

Value of investment at the end = $30,000 (1 + 0.08)

= $30,000 × 1.08

= $32,400

Interest paid = $15,000 × 6%

= $900

Rate of return:

`=(Value\ at\ the\ end-Value\ in\ beginning-Interest)/(Total\ amount-Borrowed\ amount)*100`

`=(32,400-30,000-900)/(30,000-15,000)* 100`

`=(1,500)/(15,000)* 100`

= 10%

Rate of return is 10% if the price of Telecom stock goes up by 8% during the next year.