Question

You want to buy Nu 20,000 shares with a face value of Nu 100, at par. To be able to do this, you borrow 60% of the price at an interest rate of 12% p.a. compounded annually. The annual dividend rate is 18%. At the end of the first year, how much more will you earn in dividends than pay in interest on your loan?

a) Nu 1,200
b) Nu 2,400
c) Nu 3,600
d) Nu 4,800

Answer 1

At the end of the first year, you will earn Nu 2160 more in dividends than pay in interest on your loan.

Step-by-step explanation:

To calculate the amount earned in dividends and paid in interest, we need to first calculate the interest paid and the dividends earned in the first year.

The total share price is Nu 20,000, and 60% of that is borrowed at an interest rate of 12% compounded annually. So the interest paid in the first year is 60% of Nu 20,000 multiplied by 0.12, which is Nu 1440.

The annual dividend rate is 18%, so the dividends earned in the first year is 18% of Nu 20,000, which is Nu 3600.

Therefore, the amount more earned in dividends than paid in interest at the end of the first year is Nu 3600 - Nu 1440 = Nu 2160.