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 total cost of purchasing the 300 shares is calculated by multiplying the price per share by the number of shares and the initial margin requirement:
Total cost = $60 x 300 x 0.6 = $10,800

If the stock is sold at $45 per share, the total selling price will be:
Total selling price = $45 x 300 = $13,500

The total amount borrowed on margin is:
Total amount borrowed = $60 x 300 x 0.4 = $7,200

Therefore, the total profit or loss is calculated as follows:
Profit or loss = Total selling price - Total cost - Total amount borrowed
Profit or loss = $13,500 - $10,800 - $7,200 = -$4,500

The rate of return is calculated by dividing the profit or loss by the initial cost:
Rate of return = (Profit or loss / Initial cost) x 100%
Rate of return = (-$4,500 / $10,800) x 100% = -41.67%

Therefore, the best choice is D: -42%.

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