Question

Megan bought 200 shares of stock at a price of $10 a share. She used her 70% margin account to make the purchase. Megan sold her stock after a year for $12 a share. Ignoring margin interest and trading costs, what is megan's return on investor's equity for this investment?

Answer 1

Answer:

11.7%

Explanation:

let´s first calculate the initial invested money, it envolves the margin account plus the shares bought:

$Capital(t=o)=\frac{200*10}{0.7}$

Capital(t=0)=3,428

so it means in the margin account there are left 1,428. Now let´s calculate the amount of money a year later:

Capital(t=1)=200*12 + 1,428

Capital(t=1)=3,828

Finally we can now calculate the return after a year:

$return=\frac{final value}{initial value}-1$

$return=\frac{3,828}{3,428}-1$

return=11.7%