Ed Delahanty purchased 500 shares of Niagara Corporation stock on
margin at the beginning of the year for $30 per share. The initial
margin requirement was 55%. Ed paid 13% interest on the margin loan
and never faced a margin call. Niagara paid dividends of $1 per share
during the year.

1.	At the end of the year, if Ed sold the Niagara stock for $40 per
share, what would Ed's rate of return be for the year?
2.	At the end of the year, if Ed sold the Niagara stock for $20 per
share, wht would Ed's rate of return be for the year?
3.	Recalculate your answers for (1) and (2) assuming that Ed made the
Niagara stock purchase for cash instead of on margin.

Loman ?

Niagara stock purchase = $15,000
Ed invests = $8,250
Ed borrows = $6,750

1.	Ed sells at $40/share:

Niagara sale price = $20,000
Dividends = $500
Interest = 0.13 * $6,750 = $877.50

Profits = $5,000 + $500 - $877.50 = $4,622.50

Return = $4,622.50 / $8,250 = 56.0%

2.	Ed sells at $20/share:

Niagara sale price = $10,000
Dividends = $500
Interest = 0.13 * $6,750 = $877.50

Profits = -$5,000 + $500 -$877.50 = - $5,377.50

Return = - $5,377.50 / $8,250 = - 65.2%

3.	The cash purchase percentages assume no interest payments ? but
also increase the investment to $15,000:

Ed sells at $40/share:
Profits = $5,500 
Return = $5,500 / $15,000 = 36.7% (lower than case #1)

Ed sells at $20/share
Profits = -$4,500
Return = -$4,500 / $15,000 = - 30.0% (lower negative return than case #2)


Best regards,

Omnivorous-GA