Question

Emily bought 200 shares of ABC Co. stock for $29.00 per share on 60% margin. Assume she holds the stock for one year and that her interest costs will be $80 over the holding period. Ignoring commissions, what is her percentage return (loss) on invested capital if the stock price went down 10%

Answer 1

Using the formula for percentage return, we can find that Emily's return is approximately -9.86%, indicating a loss.

Step-by-step explanation:

To calculate Emily's percentage return (loss) on invested capital, we need to determine the initial investment, final value, and total cost. Additionally, we will use the formula for the percentage return, which is the change in value divided by the initial investment.

Step 1: Calculate the initial investment:

Initial investment = Number of shares * Share price = 200 * $29.00 = $5,800

Step 2: Calculate the change in value:

Change in value = Initial investment * Percentage change in stock price = $5,800 * (-10%) = -$580

Step 3: Calculate the total cost:

Total cost = Initial investment + Interest costs = $5,800 + $80 = $5,880

Step 4: Calculate the percentage return:

Percentage return = (Change in value / Total cost) * 100% = (-$580 / $5,880) * 100% ≈ -9.86%

Therefore, Emily's percentage return on invested capital is approximately -9.86%, indicating a loss.

Answer 2

-19%

Step-by-step explanation:

Emily 200 shares at $29. So, cost of shares = 200 * $29 = $5,800

Margin is 60%. So, cash investment = $5,800 * 60% = $3,480

Stock price went down by 10%. So selling price of stock = $29 x 90% = $26.10

Sale value of stock = 200 * $26.10

Sale value of stock = $5,220

Gross profit / (Loss) = Sale value - Cost

Gross profit / (Loss) = $5,220 - $5,800

Gross profit / (Loss) = ($580)

Net loss = Gross profit / (loss) - Interest cost

Net loss = (580) - 80

Net loss = ($660)

% of loss on cash investment = (Loss / Investment) * 100

% of loss on cash investment = (-$660/$3,480) x 100

% of loss on cash investment = -18.97%

% of loss on cash investment = -19%