Question

CHEGG If you invest $200 in a stock, borrowing 90 percent of the $200 at 10 percent interest, and the stock price rises by 20 percent, what is the return on your investment

Answer 1

Return on your investment (ROI) = 20%

Step-by-step explanation:

Return on investment would be the proportion of the amount invested that is earned as profit. Note 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

Stock price at the end= 120% × 200 = 240

Capital gain = 240 - 200 = 40

Cost of fund = interest rate × amount borrowed

Amount borrowed = 90% × 200 = 180

Cost of fund = 20% × (90% × 200) = 36

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

ROI = (40 - 36)/(200 - 180)× 100 = 20%

Return on your investment (ROI) = 20%