At the beginning of 2010,Steve purchased ACME stock on margin.The initial margin requirement is 50 percent and the broker loan rate is 8 percent.Steve invested $15,000 of his own funds and margined the maximum amount allowed by the broker to purchase ACME stock.At the time,the purchase price of the stock was $25 a share.No dividends were paid during the year,and the stock was sold for $32 a share at the end of the 2010.What is the one-year holding period return for this investment?
A) 28.0%
B) 56.0%
C) 24.0%
D) 40.0%
E) 48.0%

Question

Quizplus · Accepted Answer

Steve invested $15,000 and margined another $15,000 (50% margin requirement) to buy 1,200 shares at $25 each. He sold them at $32 each, making $38,400. The loan interest was $1,200 (8% of $15,000). The profit is $38,400 - $30,000 - $1,200 = $7,200. The return is $7,200 / $15,000 = 48%.

At the Beginning of 2010,Steve Purchased ACME Stock on Margin