You’ve just opened a margin account with $20,000 at your local brokerage firm. You instruct your broker to purchase 850 shares of Landon Golf stock, which currently sells for $99 per share. Suppose the call money rate is 5 percent and your broker charges you a spread of 1.5 percent over this rate. You hold the stock for 3 months and sell at a price of $106 per share. The company paid a dividend of $.63 per share the day before you sold your stock. What is your total dollar return from this investment? What is your effective annual rate of return?
Dollar return= $5443.06
EAR 108.8%
working notes for the above answer:
Initial purchase
= 850 × $99
= $84150
Amount borrowed
= $84150-20000
= $64150
Interest on loan
= $64150(1 + 0.0650)3/12 – 64150
= $1042.43
Dividends received
= 850($0.63)
= $535.5
Proceeds from stock sale
= 850($109)
= $92650
Dollar return
= $90100 + 535.5 – 20,000 – 64150 – 1042.43
= $5443.06
Rate of return
= $5443.06 / $20,000 = 27.21% per 3 months
Effective annual return = (1 + 0.2721)12/3 – 1
=108.8%
