Last year Angela used her 60% margin account and purchased 100 shares of stock at a price of $33 a share. Today she sold this stock for $36 a share. Angela paid a total of $70 in margin interest for the year. Ignoring transaction costs, what rate of return did Angela earn on this investment?
To calculate Angela's rate of return on this investment, we need to determine the initial investment, final investment value, and account for the margin interest. Here's how you can calculate it:
1. Initial Investment: Angela purchased 100 shares of stock at a price of $33 a share. So, her initial investment can be calculated as:
Initial Investment = Number of Shares * Price per Share
Initial Investment = 100 * $33
Initial Investment = $3300
2. Final Investment Value: Angela sold the stock at $36 a share. So, her final investment value can be calculated as:
Final Investment Value = Number of Shares * Price per Share
Final Investment Value = 100 * $36
Final Investment Value = $3600
3. Margin Interest: Angela paid a total of $70 in margin interest for the year. This interest represents the cost of borrowing money to invest.
4. Adjusted Investment: To calculate the adjusted investment, subtract the margin interest from the initial investment:
Adjusted Investment = Initial Investment - Margin Interest
Adjusted Investment = $3300 - $70
Adjusted Investment = $3230
5. Calculate the Rate of Return: The rate of return can be calculated using the following formula:
Rate of Return = (Final Investment Value - Adjusted Investment) / Adjusted Investment * 100
Substituting the values:
Rate of Return = ($3600 - $3230) / $3230 * 100
Rate of Return = $370 / $3230 * 100
Rate of Return ≈ 11.44%
Therefore, Angela's rate of return on this investment is approximately 11.44%.