A broker buys 200 shares of Walmart on margin at $70 per share. The initial margin is 50% and the annual interest on margin loans is 8%. The stock price rises to $90 over the next year. What is the broker's return on the investment?

Question

Quizplus · Accepted Answer

The initial margin is 50%, so the broker would need to put down 50% of the total cost of the shares, which is (200 x $70) = $14,000. This means the broker would borrow the other 50% ($14,000) from the broker's firm.

So, the amount borrowed would be $14,000, and the annual interest rate is 8%, so the annual interest paid by the broker would be:

0.08 x $14,000 = $1,120

After one year, the stock price rises to $90. So, the total value of the shares is now:

200 x $90 = $18,000

The broker's return on investment would be:

($18,000 - $14,000 - $1,120) / $14,000 = 0.491 or 49.1%

Therefore, the broker's return on investment is 49.1%.

A Broker Buys 200 Shares of Walmart on Margin at $70