Suppose you want to invest in ABC stock that does not pay any dividends. A share is trading at $100. You put $10,000 of your own money and borrow $10,000 from your broker at 9% per year to purchase a total of 200 shares. What is the rate of return on this position if the stock goes down by 30% in the following 12 months

Question

Mohammad Henderson

Business

24 August, 02:57

Suppose you want to invest in ABC stock that does not pay any dividends. A share is trading at $100. You put $10,000 of your own money and borrow $10,000 from your broker at 9% per year to purchase a total of 200 shares. What is the rate of return on this position if the stock goes down by 30% in the following 12 months

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Emery George · Answer 1

A loss of 69%

Explanation:

Price per share $100

Equity invested $10,000

Funds taken from broker $10,000 at an Interest rate 9.00%

Total investment $20,000

Price change 30.00% less

Margin required 30.00%

Total shares purchased from investing = 200 shares

The shares decrease in value by 30%: $20,000 * 0.30 = $6,000.

You pay interest of = $10,000 * 0.09 = $900.

The rate of return will be:

"$6,000 － $900" / "$10,000" = - 0.69 = - 69%