An investor bought on margin 100 shares of Copier Corp. for $85 a share. The firm paid an annual dividend of $4 a share; the margin requirement was 60 percent with an interest rate of 8 percent on borrowed funds, and commissions on the purchase and sale were $75. The price of the stock rose $120 in one year.
a. What is the percentage earned on the investment if the stock is bough for cash (i.e, the investor did not use margin)?
b. What is the percentage earned on the investment if the stock is bought on margin?© BrainMass Inc. brainmass.com October 10, 2019, 1:57 am ad1c9bdddf
A. Sale proceeds = 120*100 = 12,000
Dividend received = 4*100 = 400
Gain = Sale proceeds + Dividend - purchase price - commissions
The solution provides an example who the return on investment changes when stocks are purchased on margin and without margin.