Investor A makes a cash purchase of 100 shares of AB&C common stock for $55 a share.

Question:

Investor A makes a cash purchase of 100 shares of AB&C common stock for $55 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $5 a share are distributed. Commissions are 2 percent of the value of a purchase or sale; the margin requirement is 60 percent, and the interest rate is 10 percent annually on borrowed funds. What is the percentage earned by each investor if he or she sells the stock after one year for?

(a) $40

(b) $55

(d) $70

If the margin requirement had been 40 percent, what would have been the annual percentage returns? What conclusion do these percentage returns imply?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...