Calculate the pre-tax rate of return in each of these scenarios.
A) Buy 1,000 shares of common stock at $50 and sell at $60 one year later.
B) Buy 1,000 shares of common stock at $50 borrowing at 50% of the amount necessary to buy it at a 2% interest rate. Sell the stock at $60 one year later paying back the loan at the same time.
C) Buy listed options at $400 for 1,000 shares of ABC, giving you the right but not the obligation to buy the shares at $50 one year later.
You exercise the option one year later when the stock price is $60.
Explain what is going on.