Question

you purchase 100 shares of Mun Tec ltd on a 55% margin when the shares are selling at K20 each. The Lusaka Stick Exchange broker charges you 10% annual interest and commissions are 3% of the total stock value on both the purchase and sale. If a year later you receive a K0.5 per share dividend and sell the stock for K27. What is your rate of return on this investment?

Answer 1

Solution:

Return On Capital (ROI) = $\frac{Net \; return\; on\; Investment}{Cost\; of\; Investment}\times 100$

Net return on Investment = Sales value + Dividends – Annual interest – Commissions

Sales value = K27$\times$100 shares = 2,700

Purchase/Cost of investment = K20$\times$100 shares = 2,000

Dividends = K0.5$\times$100 shares = 50

Annual Interest = (10$\% \times$2,000) + (10$\% \times$2,700) = 200 + 270 = 470

Commissions = (3$\% \times$2,000) + (3$\% \times$ 2,700) = 60 + 81 = 141

Net return on Investment = (2,700 + 50) – (2,000 – 470 – 141) = 139

Return On Capital (ROI) = $\frac{139}{2000} \times 100\% = 6.95\%$