Mihir and Sameer both invested $₹ 90000$ each in buying shares of two companies. Mihir invested in buying $₹ 150$ shares of 'ABC Solutions' available at a $20 %$ premium and paying a dividend of $18 %$ . Sameer invested in buying $₹ 225$ shares of 'Mphasis Ltd.' available at a $20 %$ discount and paying a dividend of $16 %$ . Whose investment is better?

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Solution

Step 1: Given Data:
Investment of Mihir, $I_{1} = ₹ 90000$
Nominal value of ABC Solutions's shares, $N_{1} = ₹ 150$
Dividend of ABC Solutions's shares, $D_{1} = 18 %$
Premium% of ABC Solutions's shares, $P % = 20 %$
Investment of Sameer, $I_{2} = ₹ 90000$
Nominal value of Mphasis Ltd's shares, $N_{2} = ₹ 225$
Dividend of Mphasis Ltd's shares, $D_{2} = 16 %$
Discount% of Mphasis Ltd's shares, $D % = 20 %$
Step 2: Calculate the number of ABC Solutions's shares:
As the shares were bought at a premium value, the market value of these shares will be greater than the nominal value because
$M a r k e t v a l u e = N o m i n a l v a l u e + P r e m i u m % o f N o m i n a l v a l u e$
$M_{1} = N_{1} + P % o f N_{1} = 150 + \frac{20}{100} \times 150 = 150 + 30 = ₹ 180$
Now,
Let us assume that the number of shares bought are $n_{1}$
$N u m b e r o f s h a r e s = \frac{I n v e s t m e n t}{M a r k e t v a l u e}$
$n_{1} = \frac{I_{1}}{M_{1}} = \frac{90000}{180} = 500 shares$
Step 3: Calculate the number of Mphasis Ltd's shares bought:
As the shares were bought at a discount, the market value of these shares will be less than the nominal value.
$M a r k e t v a l u e = N o m i n a l v a l u e - D i s c o u n t % o f N o m i n a l v a l u e$
$M_{2} = N_{2} - D % o f N_{2} = 225 - \frac{20}{100} \times 225 = 225 - 45 = ₹ 180$
Now,
Let us assume that the number of shares bought are $n_{2}$ .
$N u m b e r o f s h a r e s = \frac{I n v e s t m e n t}{M a r k e t v a l u e}$
$n_{2} = \frac{I_{2}}{M_{2}} = \frac{90000}{180} = 500 shares$
Step 4: Calculate the annual income from ABC Solutions's shares bought by Mihir
$A n n u a l i n c o m e = N u m b e r o f s h a r e s \times N o m i n a l v a l u e \times \frac{R a t e o f d i v i d e n d}{100}$
$A_{1} = n_{1} \times N_{1} \times \frac{D_{1}}{100} = 500 \times 150 \times \frac{18}{100} = ₹ 13500$
Step 5: Calculate the annual income from Mphasis Ltd's shares bought by Sameer
$A n n u a l i n c o m e = N u m b e r o f s h a r e s \times N o m i n a l v a l u e \times \frac{R a t e o f d i v i d e n d}{100}$
$A_{2} = n_{2} \times N_{2} \times \frac{D_{2}}{100} = 500 \times 225 \times \frac{16}{100} = ₹ 18000$
We can see that the annual income from Mphasis Ltd's shares bought by Sameer is greater than the annual income from ABC Solutions's shares bought by Mihir due to which Sameer's investment is better than Mihir's investment.
Final Answer: Hence, Sameer's investment in Mphasis Ltd's shares is better than Mihir's investment.

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