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We can use this equation to compute either the expected or the actual return from a margin transaction. To illustrate: Assume you want to buy
We can use this equation to compute either the expected or the actual return from
a margin transaction. To illustrate: Assume you want to buy shares of stock at $
per share because you feel it will rise to $ within months. The stock pays $ per
share in annual dividends, and during your month holding period, you will receive
half of that amount, or $ per share. You are going to buy the stock with margin
and will pay interest on the margin loan. Therefore, you are going to put up
$ equity to buy $ worth of stock that you hope will increase to $ in
months. Because you will have a $ margin loan outstanding at for
months, you will pay $ in total interest costs $$ We
can substitute this information into Equation to find the expected return on invested
capital from this margin transaction:
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