Question

ILUUGUULICO COMIGUU. Return to question You've just opened a margin account with $32,175 at your local brokerage firm. You instruct your broker to purchase 750 shares of Landon Golf stock, which currently sells for $78 per share. Suppose the call money rate is 6.5 percent and your broker charges you a spread of 1 percent over this rate. You hold the stock for three months and sell at a price of $85 per share. The company paid a dividend of $0.33 per share the day before you sold your stock points 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 $ 4,738.00 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 but not entirely correct. Effective annual return 105.28 %

Answer 1

a)
Initial purchase = 750 * $78 = $58,500.
Amount borrowed = $58,500 - $32,175 = $26,325.
Interest on loan = $26,325 * (1 + 0.075) ^(3/12) - $26,325
= 26,805.28912 - 26,325 = $480.2891239
Dividends received = 750 * $0.33 = $247.5
Proceeds from stock sale = 750 * $85 = $63,750.
Dollar return = $63,750 + $247.50 - $32,175 - $26,325 - 480.29
= $5,017.21
Dollar return = $5,017.21

b)
Rate of return = $5,017.21 / $32,175 = 15.59% per 3 months
Effective annual rate of return = (1 + 0.1559) ^12/3 - 1 = 1.785176 - 1
= 0.785176 or 78.52%
Effective annual rate of return = 78.52%