If a dividend of 40% is declared on a share of face value of Rs. 10 having market price Rs. 50, then the actual return to the investor will be:

Question

Accepted Answer

The correct option is 2:
The actual return to an investor from dividends is measured by the Dividend Yield, which is conceptually defined as the annual dividend per share divided by the current market price per share, expressed as a percentage or decimal. This is because the market price represents the actual investment made by the shareholder to acquire the stock. First, we must calculate the absolute dividend amount. The dividend is always declared on the face value of the share, which is Rs. 10, at a rate of 40%. Therefore, the dividend per share is 40% of Rs. 10, which equals Rs. 4.00. Next, we calculate the actual return by dividing this dividend amount by the market price the investor paid, which is Rs. 50. The calculation is Rs. 4.00 / Rs. 50, which gives an actual return of 0.08.

The incorrect option is 1:
The option 0.1, or 10%, is incorrect because it implies a calculation error involving either the dividend amount or the market price. A 10% return on a market price of Rs. 50 would require an annual dividend of Rs. 5.00 (Rs. 50 \* 0.10). The declared dividend is only 40% of the face value of Rs. 10, which is Rs. 4.00, not Rs. 5.00. Alternatively, an investor who calculated the dividend correctly as Rs. 4.00 would arrive at 10% only if they incorrectly took the market price as Rs. 40 (Rs. 4.00 / Rs. 40 = 0.1). Since the problem explicitly states the market price is Rs. 50, this option is based on a flawed assumption.

The incorrect option is 3:
The option 0.09, or 9%, is incorrect as it does not align with the given financial figures. To achieve a 9% return on a market price of Rs. 50, the annual dividend would need to be Rs. 4.50 (Rs. 50 \* 0.09). This figure is higher than the correct dividend of Rs. 4.00, which is based on the 40% declaration on the face value of Rs. 10. Students often arrive at intermediate incorrect figures when calculating the dividend percentage on the wrong base or when making a simple arithmetic mistake during the final division. This result suggests a conceptual or computational mistake, as 9% is not a directly derivable figure from the correct components.

The incorrect option is 4:
The option 0.07, or 7%, is incorrect and represents a significant underestimation of the investor's actual return. Achieving a 7% return on a market price of Rs. 50 would imply an annual dividend of only Rs. 3.50 (Rs. 50 \* 0.07). The dividend amount of Rs. 3.50 would have been the result of a dividend declaration of 35% on the face value of Rs. 10, not the specified 40%. Therefore, this figure does not reflect the problem's stated dividend rate and is a consequence of using an incorrect input for the dividend per share calculation.