Question

TGT is currently trading at $40 per share. You decide to buy 1,000 shares on margin with a margin percentage of 70%. Your margin loan carries an interest rate of 10% p.a. One year from today, you sell TGT at $50 per share. Your Net Profit is $__________ and you had a return of________%.

Answer 1

The share is currently trading at $40 per share. The investor bought 1,000 shares at a margin of 70%. Calculate the value of the investment as follows: Value of investment=Number of shares Price per share =1,000 $40 =$40,000 Now, calculate the amount of initial margin as follows: Initial margin=Value of investment Margin % =40,000 70% =$28,000 Thus, the amount of initial margin that is., investor's own money is $28,000. Hence, the borrowed funds are $12,000 ($40,000 - $28,000). There is interest of 10% on the borrowed money. Calculate the amount of interest as follows: Interest=Amount borrowed > Interest rate =$12,000~10% =$1,200 Thus, the interest on the loan amount is $1,200. After 1 year the hares can be sold at $50 per share. thus, calculate the net profit as follows: Net profit=(Ending share value-Beginning share value) Number of shares - Interest = [($50 – $40)*1,000-$1,200 =($10x1,000) – $1,200 =$10,000 – $1,200 =$8,800 Thus, the net profit is $8,800. Calculate the return as follows:

Net profit Return= Initial margin $8,800 $28,000 = 31.4285% Thus, the return is 31.43%.