Question

You purchase 100 shares for $50 a share ($5,000), and after a year the price rises to $60. What will be the percentage return on your investment if you bought the stock on margin and the margin requirement was (a) 25 percent, (b) 50 percent, and (c) 75 percent? (Ignore commissions, dividends, and interest expense.

Answer 1

Answer:

a. Margin requirement = 25%

Investment amount = $5000

Own investment = $5000*25% = $1250

Borrowed amount = $5000 - $1250 = $3750

Sale amount = $6000

Profit = Sale amount - Invested amount = $6000 - $5000 = $1000

Profit % = Profit/Own investment = 1000/1250 = 80%

b. Margin requirement = 50%

Investment amount = $5000

Own investment = $5000 * 50% = $2500

Borrowed amount = $5000 - 2500 = $2500

Sale amount = $6000

Profit = Sale amount - Invested amount = $6000 - $5000 = $1000

Profit % = profit/own investment = 1000/2500 = 40%

c. Margin requirement = 75%

Investment amount = $5000

Own investment = $5000*75% = $3750

Borrowed amount = $5000 - $3750 = $1250

Sale amount = $6000

Profit = Sale amount - Invested amount = $6000 - $5000 = $1000

Profit % = profit/own investment = 1000/3750 = 26.67%