Question 5 (15 points)

Adams bought of 100 shares of Bugman stock for $20 a share with cash. Smith also buys 100 shares of Bugman but uses margin. Each investor has holding period of one year, during which dividends of $0.75 a share is distributed. Commissions are 2.5percent of the value of a purchase or sale; the margin requirement is 70 percent, and the interest rate is 4.5 percent annually on borrowed funds. What is the percentage earned by each investor if he or she sells the stock after one year for (a)$17, (b) $29, and (c) $38? If the margin requirement had been 40 percent, what would have been the annual percentage returns? What conclusions do these percentage returns?