Q: suppose you buy a round lot of Margin Industries stock on 55% margin when the stock is selling at $20 a share. The broker charges a 10% annual interest rate and commissions are 3% of the total stock value on both the purchase and sale. A year later you receive a $0.50 per share dividend and sell the stock for $27. What is your rate of return on the investment?
A:44.74%
So I completely understand all the steps except for one. For the investors portion of the investment, the solution is also factoring in the 3% commission on the purchase.
Total investment (as per the book solution)= (.55 x 2000) + (.03 x 2000) = $1160
44.74% = 519/1160 (solution) vs 47.27% = 519/1100 (my understanding).
I would think it's only $1100 because the commission is going to the broker on both the purchase and sale.
In the solution, total transaction cost is $141 = [(.03 x 2000) + (.03 x 2700)] and I agree with that. I just don't understand why the $60 is being added to the total investment which is screwing up my rate if return %.
Please help clarify. Thank you.
G作者: hassan 时间: 2011-9-23 19:19
Because, after all, it's money you're doling out to acquire the position. And what you're trying to calculate is the return from entering and exiting the position inclusive of all costs.作者: ruchita 时间: 2011-9-23 19:29
