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Evaluating the Rate of Return

Ed Delahanty purchased 500 shares of Niagara Corporation stock on margin at the beginning of the year for $30 per share. The initial margin requirement was 55%. Ed paid 13% interest on the margin loan and never faced a margin call. Niagara paid dividends of $1 per share during the year.

- At the end of the year, if Ed sold the Niagara stock for $40 per share, what would Ed's rate of return be for the year?
- At the end of the year, if Ed sold the Niagara stock for $20 per share, what would Ed's rate of return be for the year?
- Recalculate your answers for questions (1) and (2) and assume that Ed made the Niagara stock purchase for cash instead of on margin.

Solution Preview

Niagara stock purchase = 500X30 = $15,000.
The initial margin is 55% implies that Ed needs to put in 55% of his own money and can borrow 45% at 13% rate.
Ed invests (15,000X55%) = $8,250
Ed borrows = $6,750

1.Ed sells at $40/share:

Niagara sale price = (500X40)= $20,000
Dividends = ...

Solution Summary

This solution provides a detailed, step-wise response which explains how to calculate the rate of return. All calculations are shown and the appropriate formulas are included.

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