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Q.

Which is the better investment:
16%  Rs.100  shares at 80  or  20%  Rs.100  shares at 120  ?


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a

16% Rs. 100 shares at 80

b

20%   Rs.100  shares at  120 

c

Both a and b

d

None of these 

answer is A.

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Detailed Solution

Concept: Let's first determine the values indicated by the statements.
In the first scenario, when the dividend rate is 16 percent and the face value of the shares is 100 rupees, the market value of the shares is 80 rupees.
In instance 2, which is 20 percent Rs. 100 shares at 120, 20 percent is the dividend rate, Rs. 100 is the share's face value, and Rs. 120 is the share's market value.
We will compare the rates of return in the two scenarios since we need to determine the superior investment.
Using the formula face value x rate of dividend Equals market value x rate of return, we can now calculate the rate of return.
Substituting the case 1 numbers into the formula above yields 100/16 percent = 80, which equals a rate of return of 100/80 ×16 percent, which equals a rate of return of 20 percent.
By changing the quantities in the rate of return formula (100 x 20% = 120) for case 2, Return Return Return = 120 ×20% Return Return = 16.6 percent
Since instance 16 percent Rs. 100 shares at 80 has a higher rate of return than case 2, it is the better investment.
Hence, option 1 is correct.
 
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