Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is
A)60 percent.
B)44 percent.
C)30 percent.
D)69 percent.

Question

Quizplus · Accepted Answer

The investor's initial investment is $25 per share. The stock appreciates by $15.25 ($65.25 - $50) and pays a $2 dividend. The total gain is $17.25. The interest on the borrowed $25 is $2.25 (9% of $25). The net gain is $15 ($17.25 - $2.25). The return is $15/$25 = 60%.

Assume That a Stock Is Priced at $50 and Pays