Problem 2-14 Margin and Leverage (LO3, CFA4)

Suppose you purchase 750 shares of stock at $35 per share with an initial cash investment of $13,125. The call money rate is 5 percent and you are charged a 1.5 percent premium over this rate. Ignore dividends.

a. Calculate your return on investment one year later if the share price is $43. Suppose instead you had purchased $13,125 of stock with no margin. What would your rate of return have been now? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

b. Calculate your return on investment one year later if the share price is $35. Suppose instead you had purchased $13,125 of stock with no margin. What would your rate of return have been now? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

c. Calculate your return on investment one year later if the share price is $19. Suppose instead you had purchased $13,125 of stock with no margin. What would your rate of return have been now? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)