# Double deduction?

Dear All- I am sharing a problem and its solution as given by the book. I have a query regarding the same. My question is at the end of the problem.

Given the following information: Shares purchased -1000 Purchase price per share- \$100 Annual dividend per share- \$2 Initial margin requirement - 40% Call money rate - 4% 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. Answer: 1. The leverage ratio = 1 I 0.40 = 2.5. 2. The total purchase price is 1 ,000 x 1 00 = 100,000. The investor must post initial margin of 40o/o x 100,000 = \$40,000. The remaining \$60,000 is borrowed. The commission on the purchase is 1 ,000 x \$0.05 = \$50. Thus, the total initial equity investment is 40,050. At the end of one year, the stock value is 1 ,000 x 1 10 = \$ 1 10,000, for a gain of \$9,950. Dividends received are 1 ,000 x \$2.00 = \$2,000. Interest paid is \$60,000 x 4o/o = \$2,400. The commission on the sale is 1 ,000 x \$0.05 = \$50. The gain on the transaction in one year is \$9,950 + \$2,000 - \$2,400 - \$50 = \$9,500. The return on the equity investment is \$9,500 I 40,050 = 23.72%. ------------------------------------------------------------ MY question is: where did we get 9950. Is it \$110000- 100000- ** 50 (Commission)**? If yes then how do we get \$9500 (As per question: \$9,950 + \$2,000 - \$2,400 - \$50 = 9,500.) Why have we deducted 50 two times here? Is the answer wrong? Your help will be deeply appreciated. THanks

You pay a \$50 commission when you purchase the stock and a \$50 commission when you sell the stock.

My mistake, I didnt read the answer carefully. Thanks magician for patiently explaining

My pleasure.