Assume that you would like to buy 100 shares of a stock that is currently priced

Question

Assume that you would like to buy 100 shares of a stock that is currently priced at $ 70. The initial margin is 75% and maintenance margin is 35%. If the stock pays $ 2 per share in annual dividend; the cost of borrowing is 396 per year; transaction costs are $ 80 calculate total dollar return and return on investment. Show your results step by step. Assume that you had bought the stock at $70 per share and it is now at $ 80 and you own 100 shares. Show your results below and in step by step. Capital gain- Dividend Interest cost Total dollar return Total % return on investment-

Explanation / Answer

Capital Gain Capital Gain = $10 ($80-$70)/Share Total Capital Gain = $10 * 100 = $ 1000 Dividend Dividend= $2/ Share Total Dividend = $2*100 = $200 Interest Cost Total Investment = 100*70*75% $5,250 Interest Cost =$ 5250*3% $157.5 Total Dollar Return Capital Gain $1000 Dividend $200 Less : Interest $157.5 $1042.5 Total Return% on Investement Income $1042.5 Investment $5250 Return= 1042.5/5250 19.86%

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