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    Calculating Return on stock

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    Suppose that you buy a stock for $48 by paying $25 and borrowing the remaining $23 from a brokerage firm at 8% annualized interest. The stock pays an annual dividend of $0.80 per share, and after one year, you are able to sell it for $65. Calculate your return on the stock. Then, calculate the return on the stock if you had used only personal funds to make the purchase. Repeat the problem assuming that only personal funds are used and that at the end of one year you are able to sell the stock at $40.

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    Solution:

    Cost of stock=$48
    Borrowings=$23
    Rate of interest=8%
    Interest expanse=23*8%=$1.84
    Selling price of stock=$65
    Dividend=$0.80
    Return=Selling Price+ ...

    Solution Summary

    The solution depicts the steps to calculate the return on stock if it is bought with personal funds and if it is purchased with borrowed funds.

    $2.49

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