Question

A stock sells for $10 per share. You purchase 100 shares for $10 a share (i.e., for $1,000), and after a year the price rises to $17.50. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was

(a) 25 percent,
(b) 50 percent, and
(c) 75 percent? (Ignore commissions, dividends, and interest expense.)

Answer 1

Answer and Explanation:

The computation is shown below;

a. Rate of return

= (Selling price - purchase price) ÷ (purchase price × margin)

= ($17.50 - $10) ÷ ($10 × 25%)

= $7.50 ÷ 2.50

= 300%

b. Rate of return

= (Selling price - purchase price) ÷ (purchase price × margin)

= ($17.50 - $10) ÷ ($10 × 50%)

= $7.50 ÷ 5

= 150%

c. Rate of return

= (Selling price - purchase price) ÷ (purchase price × margin)

= ($17.50 - $10) ÷ ($10 × 75%)

= $7.50 ÷ 7.50

= 100%