cjg05
#1
Came across this example that I am not understating. Any help is greatly appreciated:
Investor buys stock on margin and holds the position for exactly one year.
Shares purchased 700
Purchase price $22/share
Call money rate 4%
Dividend $0.60/share
Leverage ratio 1.6
Total return on the investment 12%
Assuming that the interest on the loan and the dividend are both paid at the end of the year, the
Price at which the investor sold the stock?
the question is asking for return on investment, which is NI/E or (sell price-purchase price-interest+dividend)/E
We have:
Purchase=700*22= $15,400
margin = 0.625–> E=15,400*0.625=$9,625
Debt= $5,775—> interest 1 for year is $231
Div= $420
0.12=(700*sell price-15,400-231+420)/9,625
—> Sell price = $23.38
cjg05
#3
That helps a lot, I think the leverage in there to get the margin threw me off a little. Thanks!