For company 1 and 2, What is the expected return when margin is 30%?

Investment Total = $1,250,000

Investment Allocation

Company 1 = $975,000

Company 2 = $275,000

Company 1

Stock Price = $75; EPS = 3; ROE = 0.25; beta = 3; plowback = 0.8; R (f) = 0.04; R (m) = 0.1; MRP = 0.06; ROE Value = $243,750; Alpha = 3%; Expected Loss = 4875

Company 2

Stock Price = $155; EPS = 5; ROE = 0.10; beta = 1; plowback = 0.7; R (f) = 0.05; R (m) = 0.08; MRP = 0.03; ROE Value = $27,500; Alpha = 2%; Expected Loss = 916.67

Return on Investment without leverage = 21.70%

Maintenance = 15%

Margin Loan = 5%

Answer rating: 100% (QA)

To calculate the expected return when the margin is 30 we need to consider the leveraged return on i... View the full answer