You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65% and the stock pays no dividend. Your rate of return would be if you sell the stock at $32 per share. Ignore interest on margin.

A. 35%
B. 39%
C. 43%
D. 28%

The correct answer is option (C).

Explanation:

According to the scenario, the given data are as follows:

Purchase of common stock = 250 shares

Rate per share = $25

Initial margin = 65%

Sale rate per share = $32

So, we can calculate rate of return by using following method:

First we calculate total investment,

Investment = Purchase of common stock × Rate per share × Initial margin

= 250 × $25 × 65%

= $4062.5

As, initial margin is of 65%, it means there is 35% loan, then

Loan amount = Purchase of common stock × Rate per share × Loan percentage

= 250 × $25 × 35%

= $2187.5

Now, we calculate the sale value after paying the loan amount

Sale value ( after paying loan ) = (Purchase of common stock × Sales Rate per share) - Loan amount

= (250 × $32) - $2187.5

= $5812.5

So, Rate of return = (Sales price - Investment ) ÷ Investment

= ($5812.5 - $4062.5) ÷ $4062.5

= 43.08%

= 43% ( approx.)

Hence, the rate of return is 43%.

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