A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $108.6. The customer indicates that a 8.6 percent return is not very attractive. The broker responds by suggesting the customer borrow $80 for one year at 6.6 percent interest to help pay for the investment. a. What is the customer's expected return if she borrows the money? (Round your answer to 1 decimal place.) Customer's expected return %
A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $108.6. The customer indicates that a 8.6 percent return is not very attractive. The broker responds by suggesting the customer borrow $80 for one year at 6.6 percent interest to help pay for the investment. a. What is the customer's expected return if she borrows the money? (Round your answer to 1 decimal place.) Customer's expected return %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![### Investment Return Calculation
A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $108.6. The customer indicates that an 8.6 percent return is not very attractive. The broker responds by suggesting the customer borrow $80 for one year at 6.6 percent interest to help pay for the investment.
**Problem Statement:**
- **Question:** What is the customer's expected return if she borrows the money? (Round your answer to 1 decimal place.)
**Calculation:**
- **Cost of Investment:** $100
- **Expected Payoff (in one year):** $108.6
- **Amount Borrowed:** $80
- **Interest Rate on Borrowed Amount:** 6.6%
**Steps:**
1. **Interest Calculation:**
\[
\text{Interest} = 80 \times \frac{6.6}{100} = \$5.28
\]
2. **Total Amount to Repay:**
\[
\text{Total Repayment} = 80 + 5.28 = \$85.28
\]
3. **Customer’s Own Money Invested:**
\[
\text{Own Money} = 100 - 80 = \$20
\]
4. **Net Proceeds:**
\[
\text{Net Proceeds} = 108.6 - 85.28= \$23.32
\]
5. **Expected Return:**
\[
\text{Expected Return} = \frac{Net Proceeds}{Own Money} \times 100 = \frac{23.32}{20} \times 100 = 116.6\%
\]
### Answer
**Customer's expected return**: \(116.6\%\)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa13945a9-c0dd-4d27-bf26-4a47b11dfca4%2Fa24dd522-d1f5-4ce8-b31a-74ef50f473f8%2F2c8x01g_processed.png&w=3840&q=75)
Transcribed Image Text:### Investment Return Calculation
A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $108.6. The customer indicates that an 8.6 percent return is not very attractive. The broker responds by suggesting the customer borrow $80 for one year at 6.6 percent interest to help pay for the investment.
**Problem Statement:**
- **Question:** What is the customer's expected return if she borrows the money? (Round your answer to 1 decimal place.)
**Calculation:**
- **Cost of Investment:** $100
- **Expected Payoff (in one year):** $108.6
- **Amount Borrowed:** $80
- **Interest Rate on Borrowed Amount:** 6.6%
**Steps:**
1. **Interest Calculation:**
\[
\text{Interest} = 80 \times \frac{6.6}{100} = \$5.28
\]
2. **Total Amount to Repay:**
\[
\text{Total Repayment} = 80 + 5.28 = \$85.28
\]
3. **Customer’s Own Money Invested:**
\[
\text{Own Money} = 100 - 80 = \$20
\]
4. **Net Proceeds:**
\[
\text{Net Proceeds} = 108.6 - 85.28= \$23.32
\]
5. **Expected Return:**
\[
\text{Expected Return} = \frac{Net Proceeds}{Own Money} \times 100 = \frac{23.32}{20} \times 100 = 116.6\%
\]
### Answer
**Customer's expected return**: \(116.6\%\)
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