USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Shares of RossCorp stock are selling for $45 per share. Brokerage commissions are 2 percent for purchases and 2 percent for sales. The interest rate on margin debt is 6.25 percent per year. The maintenance margin is 30 percent.
-Refer to Exhibit 3.7. At the end of one year, shares of RossCorp stock are selling for $55 per share and the company paid dividends of $0.85 per share. Assuming that you paid the full cost of the purchase, what is your rate of return if you sell RossCorp stock?
A) 18.08 percent
B) 23.51 percent
C) 22.32 percent
D) 14.96 percent
E) 19.28 percent

Question

Quizplus · Accepted Answer

The rate of return can be calculated by considering the initial cost, the final value after selling the stock (including dividends received), and the costs associated with buying and selling the stock. Initial cost per share = $45 + (2% of $45) = $45 + $0.90 = $45.90. Final value per share after selling = $55 - (2% of $55) = $55 - $1.10 = $53.90. Plus, dividends received = $0.85. So, total return per share = $53.90 + $0.85 = $54.75. Rate of return = [(Final value - Initial cost) / Initial cost] * 100 = [($54.75 - $45.90) / $45.90] * 100 = 19.28%.