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2. The leverage ratio of a margin investment is the value of the asset divided by the value of the equity position. For example, an investor who satisfies an initial margin requirement of 50% equity has a 2-to- 1 leverage ratio so that a 10o/o increase (decrease) in the price of the asset results in a 20o/o increase (decrease) in the investor's equity amount. Marks 15

Given the following information: Shares purchased 1 ,000 Purchase price per share $100 Annual dividend per share $2.00 Initial margin requirement 40o/o Call money rate 4o/o Commission per share $0.05 Stock price after one year $110

Calculate (1) the leverage ratio and (2) the investor's return on the margin transaction (return on equity) if the stock is sold at the end of one year