Question

Mr Gupta has a choice to invest in ten-rupee shares of two firms at Rs 13 or at Rs 16. If the first firm pays 5% dividend and the second firm pays 6% dividend per annum, find:
(1) which firm is paying better.
(2) if Mr Gupta invests equally in both the firms and the difference between the returns from them is Rs 30, find how much, in all, does he invest.

Answer 1

1) 1st firm

Nominal value of 1 share = Rs 10

The market value of 1 shares = Rs 13

Dividend% = 5%

Dividend = 5% of Rs 10 = Rs 0.50

`∴  Income % = "Income"/"Investment" xx 100%`

`= 0.50/13 xx 100% = 3.846%`

2nd firm

Nominal value of 1 share = Rs 10

Market value of 1 share = Rs 16

Dividend% = 6%

Dividend = 6% of Rs 10 = Rs 0.60

`∴ Income% = "Income"/"Investment" xx 100%`

`= 0.60/16 xx 100% = 3.75%`

Then first firm is paying better than second firm.

2) Let money invested in each firm = Rs y

For 1st firm

∴No. of shares purchased = y/13 shares

Total dividend = Rs `0.50 xx y/13` = Rs y/26

For 2  nd firm

∴ No. of shares purchased =    y/16 shares

Total dividend =Rs `0.60 xx y/16 = Rs (3y)/80`

Given difference of both dividend = Rs 30

`=> y/26 - (3y)/80 = Rs 30`

`=> y/1040 = Rs 30`

=> y = Rs 30 x 1040 = Rs 31200

Total money invested in both firms = Rs 31,200 × 2

= Rs 62,400