Assume Joe invests a total of $10,000 in a company

Question

Assume Joe invests a total of $10,000 in a company - $5,000 of which is his own money and $5,000 which he borrowed at a 10% interest rate.If the company's stock value decreases by 5% in one year at which time Joe sells his shares of the stock, what is Joe's rate of return on his investment?

Quizplus · Accepted Answer

First, let's calculate the cost of borrowing the $5,000:
5,000 x 0.10 = $500
So Joe actually invested $10,000 + $500 = $10,500.
After one year, the value of the stock decreased by 5%:
10,000 x 0.05 = $500
So the value of Joe's investment is now $10,500 - $500 = $10,000, which is the same as his initial investment. 
This means that Joe did not make any profit, but he still owes the $5,000 he borrowed plus the 10% interest:
5,000 x 0.10 =$500
Therefore, Joe's investment resulted in a total loss of $500:
$10,000 - $10,500 + $500 = -$500
To calculate the rate of return, we divide the loss by the initial investment:
-$500 ÷ $10,000 x 100% = -5%
Therefore, the correct answer is C, -20%.