Question

An investor purchased on margin Orange Computer for $30 a share. The stock's price subsequently increased to $50 a share at which time the investor sold the stock. If the margin requirement is 60 percent and the interest rate on borrowed funds was 7 percent, what would be the percentage earned on the investor's funds (excluding commissions)? What would have been the return if the investor had not bought the stock on margin?

Answer 1

PART – 1

Purchase Price of the Stock = $30

Margin requirement = $30 x 60% = $18

Borrowed Amount = $30 – 18 = $12

Percentage return when the investor used margin:

Profit on sale of sock = Sale Price – Purchase Price – Interest on Borrowing

= $50 - 30 – [ $12 x 0.07]

= $19.16

Therefore, Percentage earned on the investor's funds

= [ $19.16 / $18] x 100

= 106.4%

PART - 2

Percentage return when the investor had not bought the stock on margin

Profit on sale of stock = $50 - 30 = $20

Therefore, Percentage earned on the investor's funds

= [ $20 / 30 ] x 100

= 66.7%.