Explanation

The correct answer is A (-45%) because it accurately reflects the return on investment for the investor, considering the leverage and cost of borrowing.

1. Total Purchase Price: $25/share × 1,000 shares = $25,000.
2. Leverage Ratio of 2: Indicates the buyer's equity is half of the total purchase price.
   • Buyer's equity = 1/2 × $25,000 = $12,500.
   • Borrowed amount = $25,000 - $12,500 = $12,500.
3. Interest on Borrowed Money: 5% × $12,500 = $625.
4. Sale Proceeds: $20/share × 1,000 shares = $20,000.
5. Net Return to Buyer: Sale proceeds - Purchase price - Interest payment = $20,000 - $25,000 - $625 = -$5,625.
6. Return on Investment: -$5,625 / $12,500 = -45%.

Why not B or C?

• B (-40%) is incorrect because it ignores the cost of borrowing.
• C (-23%) is incorrect because it calculates the return on the total purchase value without considering leverage.