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Question
A man has a choice to invest in hundred-rupee shares of two firms at Rs. 120 or at Rs. 132. The first firm pays a dividend of 5% per annum and the second firm pays a dividend of 6% per annum. Find:
- which company is giving a better return.
- if a man invests Rs. 26,400 with each firm, how much will be the difference between the annual returns from the two firms.
Solution
i. 1st firm:
Market value of 1 share = Rs. 120
Nominal value of 1 share = Rs. 100
Dividend = 5%
Income on Rs. 120 = 5% of Rs. 100 = Rs. 5
Income on Rs. 1 = `5/120` = Rs. 0.041
2nd firm:
Market value of 1 share = Rs. 132
Nominal value of 1 share = Rs. 100
Dividend = 6%
Income on Rs. 132 = 6% of Rs. 100 = Rs. 6
Income on Rs. 1 = `6/132` = Rs. 0.045
Then investment in second company is giving better return.
ii. Income on investment of Rs. 26,400 in first firm
= `5/120 xx 26400`
= Rs. 1,100
Income on investment of Rs. 26,400 in second firm
= `6/132 xx 26400`
= Rs. 1,200
∴ Difference between both returns
= Rs. 1,200 – Rs. 1,100
= Rs. 100
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