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 $x$ be the face value.

For company A:-

MV $=Rs.80$

Dividend rate $=16\%$

Dividend per share $=$ Face value $\times$ rate

$\Rightarrow$ Divident per share $=x\times \frac{16}{100}=\frac{4x}{25}$

Rate of return $=\frac{\text{Dividend per share}}{\text{MV}}$

$\Rightarrow$ Rate of return $=\frac{4x}{25}\times \frac{1}{80}=\frac{1}{500x}$

For company B:-

MV $=Rs.120$

Dividend rate $=20\%$

Dividend per share $=$ Face value $\times$ rate

$\Rightarrow$ Divident per share $=x\times \frac{20}{100}=\frac{x}{5}$

Rate of return $=\frac{\text{Dividend per share}}{\text{MV}}$

$\Rightarrow$ Rate of return $=\frac{x}{5}\times \frac{1}{120}=\frac{1}{600x}$

Now,

$\because \frac{1}{500x}>\frac{1}{600x}$

$\Rightarrow$ Rate of return of company A is greater than that of company B.

Hence company A is more profitable than company B.