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

Joe's total investment was $10,000, but he only put in $5,000 of his own money. This means the other $5,000 was borrowed at a 10% interest rate, which amounts to $500 in interest for the year. Therefore, Joe's total cost for the investment was $10,500.

If the company's stock value decreased by 5%, Joe's investment would decrease by 5% as well, meaning he would receive $9,500 when he sells his shares.

To calculate his rate of return, we need to subtract his total cost from his total earnings and divide by his total cost:

($9,500 - $10,500) / $10,500 = -0.095 or -9.5%.

Therefore, Joe had a -9.5% rate of return on his investment, which is closest to 10% in answer choice C.