Question

ou are bullish on Telecom stock. The current market price is $30 per share, and you have $3,000 of your own to invest. You borrow an additional $3,000 from your broker at an interest rate of 3.5% per year and invest $6,000 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 5% during the next year? (Ignore the expected dividend.)

Answer 1

The rate of return = 6.5%

Step-by-step explanation:

Initial investment = $6,000

Stock price = $30

Number of shares = $6,000/$30 = 200

The share value increases by 5%

Increase in investment = $6,000 * 105% = 6,300

Increase in investment = $6,300 - $6,000

Increase in investment = $300

Interest paid = $3,000 * 3.5% = $105

The rate of return = ($300 - $105)/$3,000

The rate of return = $195 / $3,000

The rate of return = 0.065

The rate of return = 6.5%