Question

If the face value of both the shares is same, then which investment out of the following is more profitable ?
Company A : dividend 16%, MV = Rs 80, Company B : dividend 20%, MV = Rs 120.

Answer 1

Let the face value of each share be Rs x.

Market value of each share of company A = Rs 80

Dividend = 16%

Rate of return from company A = $\frac{\mathrm{Dividend}\mathrm{income}}{\mathrm{Sum}\mathrm{invested}}\times 100\%=\frac{{\displaystyle \frac{16}{100}\times x}}{80}\times 100\%=\frac{x}{5}\%$


Market value of each share of company B = Rs 120

Dividend = 20%

​Rate of return from company B = $\frac{\mathrm{Dividend}\mathrm{income}}{\mathrm{Sum}\mathrm{invested}}\times 100\%=\frac{{\displaystyle \frac{20}{100}\times x}}{120}\times 100\%=\frac{x}{6}\%$

∴ Rate of return from company A > Rate of return from company B

Thus, the investment in company A is more profitable.