Question

Gerry bought 100 shares of stock for $30.00 per share on 70% margin. Assume Gerry holds the stock for one year and that his interest costs will be $45 over the holding period. Gerry also received dividends amounting to $0.30 per share. Ignoring commissions, what is his percentage return on invested capital if he sells the stock for $34 a share?

Answer 1

THE RETURN ON INVESTMENT FOR GERRY WILL BE

Explanation:

TO CALCULATE RETURN ON INVESTMENT :

PURCHASE VALUE WILL BE TAKEN AS $30×100= 3000

DIVIDEND =$0.30×100

                = $30

INTEREST PAID = $ 45

SALE PRICE = $34*100

                    = $3400

TOTALRETURN WILL BE CALCULATED AS SALES MINUS PURCHASE AND ADDING DIVIDEND AND SUBTRACTING INTEREST PAID WHICH IS = $3400-$3000+$30-$45= $385

NOW WE WILL CALCULATE CAPITAL INVESTMENT WHICH IS =$\frac{TOTAL RETURN}{CAPITAL INVESTMENT}$ = $\frac{385}{2100}$ × 100=18.33%

OUR ACTUAL CAPITAL INVESTMENT IS 70%×3000 = $2100.

Answer 2

The percentage return is 18.33%.

• The calculation is as follows:

Amount invested is

= 30 × 100 × 70%

= $2,100  

Now

Total return is

= (100 × 0.3) + 100 × (34 - 30) - 45

= 385

Now finally

Return on invested capital is

= 385 ÷ 2100

= 18.33%

Therefore we can conclude that the  percentage return is 18.33%.

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