Problem:
Ed Delahanty purchased 500 shares of Niagara Corporation stock on margin at the beginning of the year for $30 per share. The initial margin requirement was 55%. Ed paid 13% interest on the margin loan and never faced a margin call. Niagara paid dividends of $1 per share during the year.
At the end of the year, if Ed sold the Niagara stock for $40 per share, what would Ed's rate of return be for the year?
At the end of the year, if Ed sold the Niagara stock for $20 per share, what would Ed's rate of return be for the year?
Recalculate your answers for (1) and (2) assuming that Ed made the Niagara stock purchase for cash instead of on margin.