Discussion

A man buys Rs. 25 shares paying an 8% dividend and wants a 10% return on his money. At what market price should he buy ?

Answer: B

Correct answer: Rs. 20

The dividend is reckoned on the face value.

\[\text{Dividend per share} = \frac{8}{100} \times 25 = \text{Rs. } 2\]

For that Rs. 2 to represent a 10% return, the price paid must be

\[\frac{2}{10} \times 100 = \text{Rs. } 20\]

He must therefore buy below par, which is what raises his yield above the nominal 8%.

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