Question

You buy a stock at $100 and sell it for $140;what is the percentage return if the margin requirement is 40 % and the interest rate of borrowed funds is 10%.

Answer 1

Answer:

Return on your investment (ROI) = 60%

Explanation:

Return on investment would be the proportion of the amount invested that is earned as profit. Note the following :

The amount earned as cash return would be determined as the capital gains less the interest on the loan.

Also, the amount invested would refer to the personal capital contribution made by the investor. This implies the total cost of the stock less the interest earned on the amount borrowed.

The principles above are illustrated as follows:  

Capital gain on stock = stock price at the end - stock price at the beginning

Stock price at the end = 140

Capital gain = 140 - 100 = 40

Cost of fund = interest rate × amount borrowed

Amount borrowed = 40% × 100 = 40

Cost of fund = 10% × (40% × 100) = 4  

Return on investment = Capital gains - cost of funds /(Total cost - amount borrowed)

ROI = (40 - 4)/(100 - 40)× 100 = 20%

Return on your investment (ROI) = 60%