Question

Johnny wishes to start a margin occount in order to purchase a total of $50.000 worth of shares in xyz Limited xyz's current share price is $25, so he purchases a rotal of 2000 shares: His initiol margin will be 60%. borrowing the remaining 40% ot an interest rate of 8% per annum. Twelve months later the shares had paid a cash dividend of $1 each and had a market value of $55,000. What percentoge rate of return did Johnny earn on this investment?

A) $57,000/$550,000=14%
B) $55,400/$50,000=10.8%
C) $5,400/$30,000=18%
D) $7,000/$30,000=23.33%

Answer 1

The percentage rate of return Johnny earned on his investment after one year is 84.67%, which is calculated by accounting for dividends received, increased share value, and interest paid on the borrowed amount, in relation to his initial investment.

Step-by-step explanation:

Johnny is considering starting a margin account to purchase shares in XYZ Limited. To calculate the percentage rate of return on his investment, we must consider his initial margin, the interest on the borrowed amount, the dividends received, and the final market value of the shares after one year. Johnny's initial investment is $30,000 (60% of $50,000), and he borrows $20,000 (40% of $50,000) at an 8% interest rate. After one year, he receives dividends of $2,000 ($1 per share for 2000 shares) and the shares are now valued at $55,000. The total gain is the sum of the dividends and the increase in share value minus the interest on the borrowed amount.

To calculate the rate of return, we use the following formula: (end value of investment + dividends - initial investment - interest paid) / initial investment. Thus, it is ($55,000 + $2,000 - $30,000 - ($20,000 * 0.08)) / $30,000 = ($57,000 - $30,000 - $1,600) / $30,000 = $25,400 / $30,000 = 0.8467 or 84.67%. None of the provided answer choices (A, B, C, D) are correct.