Question

A man has a choice to invest in hundred-rupee shares of two firms at Rs. 120 or at Rs. 132. The first firm pays a dividend of 5% per annum and the second firm pays a dividend of 6% per annum. Find:

1. which company is giving a better return.
2. if a man invests Rs. 26,400 with each firm, how much will be the difference between the annual returns from the two firms.

Answer 1

i. 1^st firm:

Market value of 1 share = Rs. 120

Nominal value of 1 share = Rs. 100

Dividend = 5%

Income on Rs. 120 = 5% of Rs. 100 = Rs. 5

Income on Rs. 1 = `5/120` = Rs. 0.041

2^nd firm:

Market value of 1 share = Rs. 132

Nominal value of 1 share = Rs. 100

Dividend = 6%

Income on Rs. 132 = 6% of Rs. 100 = Rs. 6

Income on Rs. 1 = `6/132` = Rs. 0.045

Then investment in second company is giving better return.

ii. Income on investment of Rs. 26,400 in first firm

= `5/120 xx 26400`

= Rs. 1,100

Income on investment of Rs. 26,400 in second firm

= `6/132 xx 26400`

= Rs. 1,200

∴ Difference between both returns

= Rs. 1,200 – Rs. 1,100

= Rs. 100