Question

One year ago you bought 250 shares of stock for £88.00 per share on margin (your initial margin was 65% ). Over the year, the interest you paid on the margin loan was £60 but you have received dividends amounting to £0.5 per share. The stock now sells for £81.50 a share in the market. There are no further commissions. What is your percentage return on invested capital? −11% −20% −12% −7%

Answer 1

The percentage return on invested capital is approximately -11%.

Step-by-step explanation:

To calculate the percentage return on invested capital, we need to consider the initial investment, any additional costs or earnings, and the final value of the investment. In this case, you initially bought 250 shares of stock for £88.00 per share, with an initial margin of 65%. This means that you paid 35% of the total cost upfront and borrowed the remaining 65% (£88.00 x 250 x 0.65 = £14,300) as a margin loan. Therefore, your initial investment was £14,300. Over the year, you paid £60 in interest on the margin loan (£14,300 x 0.06) and received £0.5 per share in dividends (£0.5 x 250 = £125). The stock is now selling for £81.50 per share, so the final value of your investment is £81.50 x 250 = £20,375. To calculate the percentage return on invested capital, we need to subtract any additional costs from the final value and divide by the initial investment, then multiply by 100. So the calculation is: ((£20,375 - £14,300 - £60) / £14,300) x 100 = -11.6%. Therefore, your percentage return on invested capital is approximately -11%.

Answer 2

The percentage return on invested capital is 42.98%.

Step-by-step explanation:

To calculate the percentage return on invested capital, we need to consider the initial investment, interest paid on the margin loan, dividends received, and the current market value of the stock.

Initial investment = 250 * £88.00 * 0.65 = £14,300

Dividends received = 250 * £0.5 = £125

Interest paid on the margin loan = £60

Current market value of the stock = 250 * £81.50 = £20,375

Total return = Dividends received - Interest paid + (Current market value of the stock - Initial investment)

= £125 - £60 + (£20,375 - £14,300)

= £65 + £6,075

= £6,140

Percentage return on invested capital = (Total return / Initial investment) * 100

= (£6,140 / £14,300) * 100

= 42.98%