Use the following information to answer the next two questions 1)Suppose you pur
ID: 2732315 • Letter: U
Question
Use the following information to answer the next two questions
1)Suppose you purchase 1,500 shares of stock at $75 per share with an initial cash investment of $50,000. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Calculate your return on invested capital one year later if the share price is $83.
.0706
.1775
.1750
.1588
2)Suppose instead you had simply purchased $50,000 of stock with no margin. What would have been your rate of return?
.1067
.0964
.0864
.0925
Explanation / Answer
LOAN AMOUNT
= (1500 * $75) - ($50000)
= $112500 - $50000
= $62500
INTEREST ON LOAN
= $62500 * 6.5%
= $4062.50
PROCEEDS FROM SALE
= 1500 * $83
= $124500
DOLLAR RETURN
= $124500 - $50000 - $62500 - $4062.50
= $7937.50
RATE OF RETURN
= $7937.50 / $50000
= 0.1588
2./
RATE OF RETURN WITHOUT MARGIN
= ($83 - $75) / $75
= 0.1067