Question

Nilesh has the option of investing his money in 8% Rs. 10 shares at a premium of Rs.3.50 or 7% Rs. 100 shares at a premium of 20%. Which of the two investments will be more profitable for him?

Answer 1

For share 1:

Face value of the share (F.V.) = ₹ 10

Premium = ₹ 3.5

∴ Market value of the share (M.V.) = 10 + 3.5

= ₹ 13.5

Dividend = 8 %

∴ Annual income from the share = `8/100 xx 10`

= ₹ 0.8

Profit percentage = `"Annual income"/"Market value" xx 100`

= `0.8/13.5 xx 100`

= `800/135`

≈ 5.93%

For share 2

Face value of the share (F.V.) = ₹ 100

Premium = 20%

∴ Market value of the share (M.V.) = `100 + (20/100 xx 100)`

= ₹ 120

Dividend = 7 %

Annual income from the share = `7/100 xx 100`

= ₹ 7

Profit percentage = `"Annual income"/"Market value" xx 100`

= `7/120 xx 100`

≈ 5.833%

Since, profit percentage from share 1 > profit percentage from share 2, investing in the first kind of shares will be more profitable for Nilesh.