Question

Megan bought 200 shares of stock at a price of $10 a share. She used her 70% margin account to make the purchase. Megan sold her stock after a year for $12 a share. Ignoring margin interest and trading costs, what is Megan's return on investor's equity for this investment?

A) 67%

B) 29%

C) 14%

D) 10%

Answer 1

Megan bought 200 shares of stock at $10 a share, so the total cost of the shares was:
200 x $10 = $2,000

Megan used her 70% margin account, so she paid 30% of the cost herself and borrowed 70% from the broker. Therefore, Megan's initial investment was:
0.3 x $2,000 = $600

After a year, Megan sold her 200 shares for $12 a share, so the total sale price was:
200 x $12 = $2,400

Megan had to repay her broker's loan of 70% x $2,000 = $1,400. Therefore, her profit was:
$2,400 - $1,400 - $600 = $400

Megan's return on investor's equity is:
($400 / $600) x 100% = 67%

Therefore, the answer is (A) 67%.