A buyer buys stock on margin and holds the position for exactly two years. During each year the stock pays the same dividend. Assume the dividend and interest on the margin loan are both paid at the end of each year. Use the following facts:

Scenario A:

No margin Stock ABC purchase price: $30/share.

Stock ABC sale price: $24/share.

Shares purchased: 850.

Dividend per share: $1.00.

Commission: $0.01 per share.

Scenario B:

Using margin Stock XYZ purchase price: $40/share.

Stock XYZ sale price: $30/share.

Shares purchased: 500.

Dividend per share: $0.20.

Commission: $0.02 per share.

Percent of purchase borrowed: 60%.

Interest rate on margin loan: 5%.

Submit a solution discussing:

•R1. What is the total annualized return on the investment in scenario A, and what is the total annualized return in Scenario B (show all your work).

•R2. Discuss the effect of using leverage in Scenario B, relative to Scenario A, and the potential effects of using leverage in your own portfolios in the future.

•R3. Choose one passage of scripture that deals with borrowing and apply it to trading stocks on margin (maximum 400 word response to R3).