Question

If the face value of both the shares is the same, then which investment out of the following is more profitable ?
Company A : dividend $16\%$, MV $=₹80$, Company B : dividend $20\%$, MV $=₹110$.

• A. A
• B. B
• C. Both
• D. None of the above

Answer 1

The correct option is A A

Let the face value of each share be $₹\text{x}$.

Market value of each share of company A $=₹80$
Dividend $=16\%$

Dividend income
$=\frac{16}{100}\times x$
$=0.16x$

Rate of return from company A
$=\frac{Dividendincome}{Suminvested}\times 100\%$
$=\frac{0.16x}{80}\times 100\%$
$=\frac{x}{5}\%$

Market value of each share of company B $=₹110$
Dividend $=20\%$

Dividend income
$=\frac{20}{100}x$
$=0.2x$

Rate of return from company B
$=\frac{Dividendincome}{Suminvested}\times 100$
$=\frac{2x}{11}\%$

$\frac{x}{5}$>$\frac{2x}{11}$

∴ Rate of return from company A > Rate of return from company B.
Thus, the investment in company A is more profitable.