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Shares and Dividends

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Certain business organizations need to raise money from public. In India, such an organization needs to be registered under the Indian Companies Act. Such an organization is called a public limited company.

A company may need money to start business or to start a new project. The sum of money required is called capital. The required capital is divided into small equal parts, and each part is called share. The company prepares a detailed plan of the proposed project and frames rules and regulations regarding its functioning. They, then, draft a proposal, issue a prospectus, explaining the plan of the project and invite the public to invest money in their project. They, thus, pool up the required funds from the public, by assigning them shares of the company. The value of a share may be Re 1, Rs 10, Rs 100, Rs 1000, etc. The capital is raised by selling these shares. A person who purchases shares of the company becomes a shareholder of the company.

Value of shares

The original value of a share printed in the certificate of the share is called its face value or nominal value (in short, NV). The NV of a share is also known as register value, printed value and par value. The price at which the share is sold or purchased in the capital market through stock exchanges is called its market value (in short, MV).

A share is said to be:

The share of a company that is doing well or expected to do well is sold in the market at a price higher than its NV. In such a situation, we say the share is at premium or above par. For example, if a share of NV of Rs 10 is selling at Rs 16 then the share is at a premium of Rs 6. The share of a company that is neither doing well nor poorly is sold in the market at a price equal to its NV. For example, if a share of NV of Rs 100 is selling at Rs 100 then the share is at par. The share of a company that is doing poorly or may do poorly in the future is sold in the market at a price lower than its NV. In such a case, we say the share is at a discount or below par. For example, if a share of NV of Rs 100 is selling at Rs 80 then the share is at a discount of Rs 20.

Dividend, Rate of Dividend

The part of the annual profit of a company distributed among its shareholders is called dividend. The dividend is always reckoned on the face value of a share irrespective of its MV.

The rate of dividend is expressed as a percentage of the NV of a share per annum.

Meaning of the statement “r% Rs 100 at Rs M”

The statement r% Rs 100 shares at Rs M means the following:

Look at the statement given below:

Formula

1. Sum invested = No. of shares bought MV of 1 share

2. No. of shares bought

Also, no. of shares bought  from 1 share

3. Income (return or profit) = (No. of shares) (rate of dividend) (NV) =(No. of shares) (Dividend on 1 share)

4. Return % = Income (profit) %

NOTE: The face value of a share remains the same. The market value of a share changes from time to time.

Examples

Example 1: Calculate the money required to buy: (i) 350, Rs 20 shares at a premium of Rs 7. (ii) 275, Rs 60 shares at a discount of Rs 10. (iii) 50, Rs 75 shares quoted at Rs 71.50.

Solution: (i) No. of shares = 350

NV = Rs 20

MV = Rs (20+7) = Rs 27

Therefore, money required to buy 350 shares = Rs (350 27)= Rs 9450

(ii) No. of shares = 275

NV= Rs 60

MV= Rs (60-10) = Rs 50

Therefore, money required to buy 275 shares = Rs (275 50) =Rs 13750

(iii) No. of shares = 50

NV= Rs 75

MV= Rs 71.50

Therefore, money required to buy 50 shares= Rs (50 71.50) = Rs 3575

Example 2: A man invests in shares for which we have the condition “7% Rs 100 shares at Rs 120”. What is the annual income of a person holding 150 such shares? Also, find his annual profit percentage.

Solution: Given,

Rate of dividend=7%

Nominal value (NV) = Rs 100

Market value (MV) = Rs 120

No. of shares= 150

Therefore, Income =No. of shares rate of dividend NV=

First we need to find the sum invested to find the profit percentage.

Investment=No. of shares MV=

Therefore, Required profit percentage

Example 3: Which is a better investment: 16% at 80 or 20% at 120?

Solution: 16% at 80 means MV of 1 share is Rs 80, NV of 1 share is Rs100 and dividend paid is 16%.

Similarly, 20% at 120 means MV of 1 share is Rs 120, NV of 1 share is Rs 100 and dividend paid is 20%.

Case 1:

Income on Rs 80=16% of Rs 100=Rs 16

Therefore, income on

Case 2:

Income on Rs 120=20% of Rs 100= Rs 20

Therefore, income on

Therefore, the first investment is better.

Example 4: A company declares semiannual dividend of 6%. A man has 500 shares of NV Rs 25 each. Find his annual income.

Solution: Total NV of shares= Rs(25 500)= Rs 12500

Semiannual dividend = 6% of Rs 12500=

Therefore, his annual income= Rs (750 2)=Rs 1500

Example 5: Divide Rs 29184 into two parts such that if one part is invested in 12%, Rs 100 shares at 4% discount and the other in 15%, Rs 100 shares at 8% premium, the annual incomes are equal.

Solution: Let the investment in 12%, Rs 100 shares at 4% discount be .

Then, investment in 15%, Rs 100 shares at 8% premium be .

MV of Rs 100 shares at 4% discount= Rs (100-4% of 100) = Rs 96

Annual income on 1 share of Rs 96=Rs (12% of 100) = Rs 12

Annual income on

MV of Rs 100 shares at 8% premium= Rs (100+8% of 100) = Rs 108

Annual income on 1 share of Rs 108=Rs (15% of 100) = Rs 15

Annual income on

So,

So, the first part is Rs 15360.

Second part= Rs (29184-15360) = Rs 13824

Example 6: Mukul invests Rs 9000 in a company paying a dividend of 6% per annum when a share of NV Rs 100 stands at Rs 150. What is his annual income? If he sells 505 of his shares when the price rises to Rs 200, what is his gain in this transaction?

Solution: No. of shares bought by Mukul=

His annual income on 1 share=6% of NV=6% of Rs 100= Rs 6

His total annual income=60  Rs 6= Rs 360

Since, 50% of shares= 50% of 60 =30

Money received on selling these shares =30  Rs 200=Rs 6000

Also, cost of these shares=30  Rs 150=Rs 4500

Therefore, Mukul’s gain= Rs (6000-4500) = Rs 1500

Example 7: A man wants to buy 62 shares available at Rs 132(NV being Rs 100).

  1. How much will he have to invest?
  2. If the dividend is 7.5%, what will be his annual income?
  3. If he wants to increase his annual income by Rs 150, how many extra shares should he buy?

Solution: 1. He will have to invest= 62  Rs 132= Rs 8184

2. Dividend on 1 share= 7.5% of Rs 100=Rs 7.50

Therefore, his annual income = 62  Rs 7.50= Rs 465

3. The man wants to increase his income by Rs 150 and income on 1 share= Rs 7.50

Therefore, no. of extra shares he must buy= $latex\dfrac{150}{7.50} = 20 $

Exercise

  1. Rahul buys Rs 100 shares at Rs 20 premium in a company paying 15% dividend. Find:
    • The market value of 200 shares
    • His annual income and
    • His percentage income
  2. Which is a better investment: 12% Rs 100 shares at 120 or 8% Rs 100 shares at 90?
  3. Divide Rs 1,21,824 into two parts such that if one part is invested in 8% Rs100 shares at 8% discount and the other in 9% Rs100 shares at 8% premium, the annual incomesfrom both the investments are equal.
  4. Ms Tirkey buys shares of a company for Rs 8000 at a discount of Rs 20(par value Rs 100). The company pays a 6% dividend annually. Find:
    1. The number of shares bought by Ms Tirkey
    2. Her annual income from the shares.
    3. Her annual profit percentage from the shares
  5. A man invests Rs 15,840 in buying shares of face value Rs 24 selling at a premium of 10%. The company pays a 15% dividend annually. Find:
    1. The dividend he receives annually
    2. The rate of return from his investment
  6. Mr. Chaudhury invests Rs 20,800 in 6% Rs100 shares at a premium of 4% and Rs 14,300 in 10.5% Rs100 shares at a premium of 43%. What will be his total annual income from these shares?
  7. A company declares semi-annual dividend of 6%. A man has some shares of the company, nominal value of each share being Rs100. If his annual income from the shares is Rs 1800, find the number of shares held by him.
  8. Mr. Dixit invests Rs 43,680 in buying Rs100 shares at a discount of 9%. He sells shares worth Rs 24000 at a premium of 5% and the rest at a discount of 10%. Find the total gain or loss from the transaction.
  9. A man sold 400 Rs 20 shares of a company paying 5% at Rs 18 and invested the proceeds in Rs10 shares of another company paying 7% at Rs12. How many Rs10 shares did he buy and what was the change in his income?
  10. Mrs. Sharma buys 85 shares (par value Rs 100) at Rs150 each. i) If the dividend is 6.5% what will be her annual income? ii) If she wants to increase her income by Rs260 how much more should she invest?
  11. Two brothers A and B invest Rs16000 each in buying shares of two companies. A buys 3% Rs100 shares at 80 and B buys Rs10 shares at par. If they both receive equal dividend at the end of the year, find the rate percent of the dividend received by B.
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