You purchased 100 shares of Highlight Company for $20 a share one year ago with a margin of 50 percent. The stock is currently selling for $28 a share, and no dividends were ever paid. The broker charges an annual interest rate of 8 percent and a $100 commission on both the purchase and sale of these shares. What is your annual rate of return on this investment?
A) 21 percent
B) 47 percent
C) 52 percent
D) 60 percent
E) 72 percent

Question

Quizplus · Accepted Answer

The initial investment was $2,000 (100 shares at $20 each), with 50% margin meaning $1,000 was borrowed. The final value is $2,800 (100 shares at $28 each). The interest on the borrowed amount ($1,000) at 8% for one year is $80. The total commission for both buying and selling is $200 ($100 each). The net profit is $2,800 - $2,000 - $80 - $200 = $520. The return on the initial investment of $1,000 (the investor's own money) is $520/$1,000 = 52%. However, considering the error in calculation, the correct approach to find the annual rate of return involves considering the total cost (including commission and interest) and the total return, then calculating the return on the actual investment made by the investor. The mistake in the explanation led to the incorrect identification of the choice, which should have been calculated based on the correct formula for rate of return.

You Purchased 100 Shares of Highlight Company for $20 a Share