Question

You are bullish on Telecom stock. The current market price is $20 per share, and you have $2,000 of your own to invest. You borrow an additional $2,000 from your broker at an interest rate of 7.5% per year and invest $4,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 9% during the next year

Answer 1

Rate of return = 10.5%

Step-by-step explanation:

Rate of return would be the proportion of the amount invested that is earned as profit. Kindly note the the following :

The amount earned as cash return would be determined as the capital gains less the interest on the loan.

Also, the amount invested would refer to the personal capital contribution made by the investor. This implies the total cost of the stock less the interest earned on the amount borrowed.

The principles above are illustrated as follows:

Capital gain on stock = stock price at the end - stock price at the beginning

units of stock purchased = 4000/20 = 200

Stock price at the end= 109% × 20 = 21.8

Capital gain = (21.8 - 20) × 200 = 360

Cost of fund = interest rate × amount borrowed

Amount borrowed = 2000

Cost of fund= 7.5% × 2000 = 150

Rate of Return = Capital gains - cost of funds /(Total cost - amount borrowed)

Rate of return= (360 - 150)/(4000-2000)× 100 = 10.5%

Rate of return = 10.5%