You’ve just opened a margin account with $12,000 at your local brokerage firm. You instruct your broker to purchase 600 shares of Landon Golf stock, which currently sells for $76 per share. Suppose the call money rate is 6.5 percent and your broker charges you a spread of 1.5 percent over this rate. You hold the stock for 5 months and sell at a price of $81 per share. The company paid a dividend of $.31 per share the day before you sold your stock. 1. What is your total dollar return from this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.) Dollar return $ 2206.16 2. What is your effective annual rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.) Effective annual return %
Total cost of stock: 76 * 600
= $45,600
typically you have a margin, but you don’t mention the margin requirement so I’ll assume your cash in is the $12,000.
That means…
45,600 – 12,000
= $33,600 is financed
in 5 months you will owe 33,600 * [1 +(0.065 + 0.015)/2]
= $34,720
Gross Proceed at sale: 600 * $81
= 48,600
+ dividend: 0.31 * 600
= 186
Total Gross: $48786
repay the loan: 48786 – 34720
= net proceeds: 14066
subtract your original $12k investment = 2066 <Total dollar return
FYI…2066/ 12,000 = 0.1721 or about a 17.21% return in 5months.
So yearly return is
17.21 *12/5
=41.32%
