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You are bullish on Telecom stock. The current market price is $62 per share, and you have $6,200 of your own to invest. You borrow an additional $6,200 from your broker at an interest rate of 7.6% per year and invest $12,400 in the stock. a. What will be your rate of return if the price of Telecom stock goes up by 9% during the next year? (Ignore the expected dividend.) (Round your answer to 2 decimal places.)

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anthougo

Answer:

Telecom Stock

If the price of the Telecom stock goes up by 9% during the next year, your rate of return will be:

= 10.4%

Explanation:

a) Data and Calculations:

Current market price = $62 per share

Investment in stock = $12,400

Margin account =        $6,200

Loan =                         $6,200 ($12,400 - $6,200)

Units of stock bought on margin = 200 ($12,400/$62)

Margin account interest rate = 7.6%

Growth rate of stock price = 9%

Expected market price of the stock = $67.58 ($62 * 1.09)

Expected value of stock = $13,516 (200 * $67.58)

Interest on loan =                  $471.20 ($6,200 * 7.6%)

Principal & loan amount  $12,400

Return on the stock =          $644.80

Rate of return = 10.4% ($644.80/$6,200 * 100)

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