Question

You've just opened a margin account with $15,600 at your local brokerage firm. You instruct your broker to purchase 650 shares of Landon Golf stock, which currently sells for $48 per share. Suppose the call money rate is 6 percent and your broker charges you a spread of 1.5 percent over this rate. You hold the stock for four months and sell at a price of $55 per share. The company paid a dividend of $0.27 per share the day before you sold your stock. a. What is your total dollar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Answer is complete but not entirely correct. Dollar return $ 4,335.00 b. What is your effective annual rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Answer is complete and correct Effective annual return 108.69

Answer 1

a. You bought 650 shares of worth= 650*48=$31200

Hence, you took loan of =(31200-15600)=$15600 from your broker

Interest on the borrowed fund=6%+1.5%=7.5%

Hence, for 4 month holding you will pay interest amount=15600*(7.5%/3)=$390

You dollar return= Capital Gain+Dividend Gain-Interest=650*(55-48)+650*0.27-390=$4335.5

b. Net return on investment for 4 month= Dollar return/initial investment=4335.5/15600=27.792%

Hence, Effective annual return= (1+27.792%)^(12/4)-1=108.69%