Question: Assume that a stock is priced at $50 and pays an annual dividend of $2 per share.
A. Assume that an investor purchases the stock paying 100% cash. After one year, the investor sells the stock for $65.25 per share (after collecting the dividend). The percentage return on this investment was _____.
B. Assume that an investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm (ignore interest on the margin loan). After one year, the investor sells the stock for $65.25 per share (after collecting the dividend). The percentage return on this investment was ____.
C. Should you advise your clients to purchase stocks on margin, or pay cash?