Shares & Dividends — Case-Study Based Question

Case study:
Share market is a place where investors trade different instruments like stocks, mutual funds, etc.

It is a place where companies sell parts (called shares) of their companies and investors buy them in expectation of greater returns.

Mr. Reddy wants to invest his money in company which gives a better return. He has following options:

Company X : ₹ 100 shares are available at ₹ 120 with a dividend of 8% p.a.

Company Y : ₹ 10 shares are available at ₹ 8 with a dividend of 6% p.a.

Based on the above information, answer the following questions :

(i) If Mr. Reddy wants to invest ₹ 15,000 in company X, then what will be his Annual Income ?

(ii) If Mr. Reddy wants to invest ₹ 15,000 in company Y, then what will be his Annual Income ?

(iii) Which company is a better option for Mr. Reddy to invest in ?

Answer

(i) Given,

For company X :

N.V = ₹ 100

M.V. = ₹ 120

Dividend = 8%

Investment = ₹ 15,000

Number of shares = $\dfrac{\text{Total investment}}{\text{Market value of each share}} = \dfrac{15000}{120} = 125$

Annual Income from Company X = No. of shares × Rate of div. × N.V. of 1 share

= 125 × $\dfrac{8}{100}$ × 100

= 125 × 8

= ₹ 1,000.

Hence, annual income from Company X = ₹ 1,000.

(ii) Given,

For company Y :

N.V = ₹ 10

M.V. = ₹ 8

Dividend = 6%

Investment = ₹ 15,000

Number of shares = $\dfrac{\text{Total investment}}{\text{Market value of each share}} = \dfrac{15000}{8} = 1875$

Annual Income from Company Y = No. of shares × Rate of div. × N.V. of 1 share

= 1875 × $\dfrac{6}{100}$ × 10

= 1875 × 0.6

= ₹ 1,125

Hence, annual income from Company Y = ₹ 1,125.

(iii) Annual income from Company X = ₹ 1,000

Annual income from Company Y = ₹ 1,125

Since, ₹ 1,125 > ₹ 1,000

Thus, company Y gives better return than company X.

Hence, it is a better option to invest in company Y.