1. Supppose you buy a round lot of Horse Inc. stock on 55% margin when it...

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1. Supppose you buy a round lot of Horse Inc. stock on 55% margin when it is selling at $40 a share. The broker charges a 10 percent annual interest rate and commissions are 4 percent of the total stock value on both the purchase and the sale. If at year end you receive a $0.90 per share dividend and sell the stock for 355/8, what is your rate of return on the investment? Rate of Return = Profit + Initial investment Profit = Ending Stock Value +Dividend - Initial Stock Value - Transaction Costs -Interest Ending Value = Ending Market Value + Dividend Value = $3562.50 + $90= $3652.50 Initial Stock Value = 100($40) = $4000 Transaction Costs = (0.04) (4000 + (0.04)(3562.50) = $302.50 Interest = (0.10)(0.45) ($4000) = $180.00 ... Profit = $3652.50 - $4000 - $302.50 - $180.00 - $830.00 Initial investment Margin deposit + Commission = (0.55) ($4,000) + (0.04) ($4,000) = $2,360 ... Rate of Return = $830.00/$2360= -0.3517 = -35.17% 1. Supppose you buy a round lot of Horse Inc. stock on 55% margin when it is selling at $40 a share. The broker charges a 10 percent annual interest rate and commissions are 4 percent of the total stock value on both the purchase and the sale. If at year end you receive a $0.90 per share dividend and sell the stock for 355/8, what is your rate of return on the investment? Rate of Return = Profit + Initial investment Profit = Ending Stock Value +Dividend - Initial Stock Value - Transaction Costs -Interest Ending Value = Ending Market Value + Dividend Value = $3562.50 + $90= $3652.50 Initial Stock Value = 100($40) = $4000 Transaction Costs = (0.04) (4000 + (0.04)(3562.50) = $302.50 Interest = (0.10)(0.45) ($4000) = $180.00 ... Profit = $3652.50 - $4000 - $302.50 - $180.00 - $830.00 Initial investment Margin deposit + Commission = (0.55) ($4,000) + (0.04) ($4,000) = $2,360 ... Rate of Return = $830.00/$2360= -0.3517 = -35.17%

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