Suppose you buy a round lot of HS Inc.stock on 55% margin when it is selling at $40 a share.The broker charges a 10 percent annual interest rate and commissions are 4 percent of the total stock value on both the purchase and the sale.If at year end you receive a $0.90 per share dividend and sell the stock for 35 5/8,what is your rate of return on the investment?

Question

Quizplus · Accepted Answer

Rate of Return = Profit ¸ Initial investment
Profit = Total Return - Initial Stock Value - Transaction Costs - Interest
 Tatal Return
= Enfling Market Value $+$ Divende Value
$$= \$ 3562.50 + \$ 90 = \$ 3652.50$$ 
Initial Stock Value = 100($40)= $4000
Transaction Costs = (0.04)(4000)+ (0.04)(3562.50)= $302.50
Interest = (0.10)(0.45)($4000)= $180.00
$ \therefore $ Profit = $3652.50 - $4000 - $302.50 - $180.00 = -$830.00
 Intinal investinent= Marpin teposit + Comminsian
$$= ( 0.55 ) ( 4,000 ) + ( 0.04 ) ( 44,000 ) = 42,360$$ $ \therefore $ Rate of Return = -$830.00/$2360 = -0.3517 = -35.17%

Suppose You Buy a Round Lot of HS Inc