Assume that sharon purchases $5,000 worth of a stock. to do so she uses $1,000 of her own money and borrows the remaining $4,000 at a 7.0% interest rate. if the stock's value decreases by 10% in one year and she has to sell the stock at that time, what is her rate of return?

Rate of return = -78%

Explanation:

given data

purchases = $5,000

uses = $1,000

remaining  = $4,000

interest rate = 7%

stock's value decreases =  10%

solution

we know here cost of borrowing will be with 7 % is

cost of borrowing = 7% of  4,000

cost of borrowing = 280

so

Value of stock after 1 year = 5000 - 5000 × 10%

Value of stock after 1 year = 4500

and

total increase in stock value = value of stock after 1 year - cost of borrowing - Initial value       .....................1

put here value we get

Total increase in stock value = 4500 - 280 - 5000

Total increase in stock value = -780

and

Rate of return  will be here

Rate of return =  ....2

put here value

Rate of return =

Rate of return = -0.78

Rate of return = -78%