How do I find stock on margin rate of return?
This is the question:
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 (1) and (2) assuming that Ed made the Niagara stock purchase for cash instead of on margin.
If I did this correctly, i have the formula Margin = (market value of securities - debit balance) / market value of securities.. therefore i have
(20000-9000) / 20000 = 55% margin at $40 per share
(10000 - 4500) / 10000 = 55% margin at $20 per share
Am i doing this right???
Yes, you have correctly calculated the margin in both scenarios, assuming the formula Margin = (market value of securities - debit balance) / market value of securities.
For the first scenario, where Ed sold the Niagara stock for $40 per share at the end of the year, the calculation is as follows:
Margin = ($40 * 500 - $9,000) / ($40 * 500) = $31,000 / $20,000 ≈ 1.55
To find Ed's rate of return, you need to consider the dividends received and the interest paid on the margin loan.
Rate of Return = (Selling Price + Dividends - Initial Investment - Interest Paid) / Initial Investment
In this case, the dividends received would be $1 per share, so a total of $1 * 500 = $500.
The interest paid on the margin loan would be 13% of the initial margin requirement (55%) multiplied by the initial loan amount ($30 * 500 * 55% * 13%).
Initial Investment = 500 shares * $30 per share = $15,000
Rate of Return = ($40 * 500 + $500 - $15,000 - $2,262.50) / $15,000
Now you can calculate the rate of return.
You can follow the same steps for the second scenario, where Ed sold the Niagara stock for $20 per share at the end of the year.
For the second part of your question, if Ed made the Niagara stock purchase for cash instead of on margin, you would calculate the rate of return by considering the initial investment and the dividends received.
Initial Investment = 500 shares * $30 per share = $15,000
Rate of Return = ($40 * 500 + $500 - $15,000) / $15,000
Again, you can follow the same steps to calculate the rate of return for the case where Ed sold the Niagara stock for $20 per share.
You are on the right track, but there are a couple of errors in your calculations.
To find the rate of return on margin, we need to use the formula:
Rate of return = (Proceeds from sale - Initial investment - Interest paid - Dividends received) / Initial investment
Let's calculate the rate of return for each scenario:
1. Selling the Niagara stock for $40 per share:
Initial investment = 500 shares * $30 per share = $15,000
Margin = 55% of $15,000 = $8,250 (inverse of the margin requirement, as you mentioned)
Proceeds from sale = 500 shares * $40 per share = $20,000
Interest paid = 13% * $8,250 = $1,072.50 (as you stated)
Dividends received = 500 shares * $1 per share = $500
Rate of return = ($20,000 - $15,000 - $1,072.50 - $500) / $15,000
2. Selling the Niagara stock for $20 per share:
Proceeds from sale = 500 shares * $20 per share = $10,000
Rate of return = ($10,000 - $15,000 - $1,072.50 - $500) / $15,000
Now, let's recalculate the rate of returns assuming Ed made the purchase for cash instead of on margin:
1. Selling the Niagara stock for $40 per share:
Initial investment = 500 shares * $30 per share = $15,000
Proceeds from sale = 500 shares * $40 per share = $20,000
Dividends received = 500 shares * $1 per share = $500
Rate of return = ($20,000 - $15,000 - $500) / $15,000
2. Selling the Niagara stock for $20 per share:
Proceeds from sale = 500 shares * $20 per share = $10,000
Rate of return = ($10,000 - $15,000 - $500) / $15,000
Please use these formulas and values to calculate the rate of return for each scenario accurately.