Question

You are bullish on Telecom stock. The current market price is $80 per share, and you have $10,000 of your own to invest. You borrow an additional $10,000 from your broker at an interest rate of 8% per year and invest $20,000 in the stock. What will be your rate of return if the price of Telecom stock goes up by 9% during the next year? The stock currently pays no dividends. (Negative value should be indicated by a minus sign. Round your answer to the nearest whole number.)

Answer 1

Answer:

return on equity = 10 %

Explanation:

given data

current market price = $80 per share

own  invest = $10,000

borrow  additional =  $10,000

interest rate = 8% per year

invest  in stock = $20,000

to find out

rate of return

solution

we know here total investment is 80 × 250 shares = $20,000

and

stock price rise 9 % that is

stock price = 80 × ( 1 + 9%)

stock price = $87.2

and after 1 year investment value will be = 250 × 87.2

after 1 year investment value = $21800

so

payment to broker will be

payment to broker = borrow fund + interest

payment to broker = $10000 × ( 1+ 8% )

payment to broker = $10800

so remaining after payment to broker is = $21800 - $10800  =  $11000

so

return on equity is here

return on equity = $\frac{11000-10000}{10000}$

return on equity = 10 %