Question

You are bullish on Telecom stock. The current market price is $50 per share, and you have $5,000 of your own to invest. You borrow an additional $5,000 from your broker at an interest rate of 8% per year and invest $10,000 in the stock. (LO 3-4) a. What will be your rate of return if the price of Telecom stock goes up by 10% during the next year

Answer 1

Answer:

12%

Explanation:

Initial investment =$5,000.00

Value of stock with 10%=$10,000*(1+10%)=$11,000

The amount repayable to the broker after one year is the amount borrowed plus interest of 8%

Amount borrowed plus interest= $5,000+( $5,000 *8%)

Amount borrowed plus interest=$5,400

Rate of return=(Value of stock with 10%-Amount borrowed plus interest-equity fund)/amount borrowed

Rate of return=($11,000-$5,400-$5000)/$5,000=12%