You purchased 300 shares of common stock on margin for $60 per share. The initial margin is 60%, and the stock pays no dividend. What would your rate of return be if you sell the stock at $45 per share? Ignore interest on margin.
A. 25.00%
B. –33.33%
C. 44.31%
D. –41.67%
E. –54.22%
D. –41.67%
300($60)(0.60) = $10,800 investment; 300($60) = $18,000 × (0.40) = $7,200 loan; proceeds after selling stock and repaying loan: $13,500 – $7,200 = $6,300; Return = ($6,300 – $10,800)/$10,800 = –41.67%.
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