Question

You may purchase 100 shares of Mun Tee ltd on a 55 percent margin when the shares are selling at K20 each. The Lusaka stock exchange broke charges you 10 percent annual interest,and commission are 3 percent of total stock value on both the purchase and the sale. If a year later you receive a K0.50 per share dividend and sell the stock for K27. What's your rate of return on investment?

Answer 1

Number of shares = 100 shares

Margin percentage = 55%

Initial investment amount $= 100 \space shares \times 20 \times 55\% = 1100$

Interest expense on 45% of the investment from own funds

$= 20 × (1−55 \%) × 100 × 10\% = 90$

Commission amount $= ( 20 + 27) \times 100 \times 3\% = 141$

Dividend amount $= 100 \times 0.50 = 50$

Amount received from sale $= 100 \times 27 = 2700$

Cost of shares $= 100 \times 20 = 2000$

Rate of return $=\frac{ 2700−2000+50−90−141}{ 1100}$

Rate of return $= \frac{519}{ 1100} =0.4718 \space or\space 47.18\%$