Question

What will be your rate of return if the price of Telecom stock goes up by 10% during the next year? (Ignore the expected dividend.)

Answer 1

The answer is 12%

Step-by-step explanation:

Initial investment:

$5,000 in equity + $5,000 in debt

=$10,000

Number of shares bought with the initial investment is:

Initial investment/Stock price

= $10,000/$50 = 200 shares.

The shares increase in value by 10%: $10,000 x 0.10 = $1,000.

Interest on debt = $5,000 x 0.08 = $400.

The rate of return will be:

($1,000 - $400) ÷ $5,000

0.12

Expressed as a percentage:

12%