You purchased 300 shares of common stock on margin for $60 per share.The initial margin is 60%, and the stock pays no dividend.What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.

Question

Quizplus · Accepted Answer

The rate of return when selling the stock at $45 per share, considering the initial margin of 60%, can be calculated as follows:1. The total cost of the 300 shares at $60 per share is $18,000.2. The amount borrowed is 40% of the total cost (since the initial margin is 60%), which is $7,200.3. The equity (initial margin) is 60% of the total cost, which is $10,800.4. If the stock is sold at $45 per share, the total sales proceeds are 300 shares * $45 = $13,500.5. The return on the investment is the sales proceeds minus the amount borrowed ($13,500 - $7,200 = $6,300) minus the initial equity ($10,800).6. The loss is $10,800 - $6,300 = $4,500.7. The rate of return is the loss divided by the initial equity, which is -$4,500 / $10,800 = -41.67%.

You Purchased 300 Shares of Common Stock on Margin for $60