Chapter in a nutshell: A company raises capital by issuing shares of a fixed face (nominal) value, bought/sold at the market value. The company pays a dividend (a % of the face value) on each share. You compute investment, number of shares, annual income (dividend) and the percentage return (yield).
1. Key Ideas & Terms
- Face/Nominal Value (FV/NV): the printed value of a share (dividends are always a % of this).
- Market Value (MV): the price at which a share is bought/sold in the market.
- At par: MV = FV; at premium (above par): MV > FV; at discount (below par): MV < FV.
- Dividend: profit shared by the company, declared as r % of the face value per share.
- Yield / rate of return: the income as a percentage of the money actually invested.
2. Formulas (quick reference)
- Number of shares $=\dfrac{\text{total investment}}{\text{MV of one share}}=\dfrac{\text{total face value}}{\text{FV of one share}}$
- Investment $=\text{number of shares}\times \text{MV}$
- Dividend (annual income) $=\dfrac{r}{100}\times\text{FV}\times\text{number of shares}=\dfrac{r}{100}\times\text{total face value}$
- Income per share $=\dfrac{r}{100}\times\text{FV}$
- Return % (yield) $=\dfrac{\text{annual income}}{\text{investment}}\times100$
- MV at premium $=\text{FV}+\text{premium}$; at discount $=\text{FV}-\text{discount}$.
3. Prerequisite (earlier-class) Idea
- Percentage: $x\%\text{ of }A=\dfrac{x}{100}\times A$ โ used for both dividend and yield.
4. Worked Example (one, for the method)
Q. A man buys shares of FV โน100 at โน125; the company pays a 15% dividend. He invests โน25000. Find his income and yield. Solution: Number of shares = 25000 รท 125 = 200. Income = 15% ร 100 ร 200 = โน3000. Yield = (3000/25000)ร100 = 12%.5. Common Mistakes to Avoid
- Taking the dividend on the market value โ it is always on the face value.
- Computing yield on the face value โ yield is on the money invested (MV).
- Confusing premium (MV above FV) with discount (MV below FV).
- Mixing number of shares found from MV (for investment) vs FV (for face value).
6. Likely Exam Questions (with crisp answers)
- On what value is the dividend calculated? โ The face (nominal) value.
- On what value is the yield/return calculated? โ The money invested (market value).
- Define a share at premium. โ A share whose market value is above its face value.
- Number of shares = ? โ Total investment รท market value of one share.
- Annual income = ? โ (dividend% ร FV) ร number of shares.
- Yield % = ? โ (annual income รท investment) ร 100.
- FV โน100, 12% dividend โ income per share? โ โน12.
- A โน50 share at โน60 is at par, premium or discount? โ Premium (by โน10).
- If MV = FV, the share is said to be at? โ Par.
- Investment = ? โ Number of shares ร market value.
Formulas โ Current & Prerequisite
Current
- Number of shares $= \dfrac{\text{Total investment}}{\text{Market Value (MV) of 1 share}} = \dfrac{\text{Total face value}}{\text{Nominal Value (NV)}}$.
- Annual income (dividend) $= \text{No. of shares}\times \text{NV}\times \dfrac{\text{rate of dividend}}{100}$.
- Total investment $= \text{No. of shares}\times MV$.
- Return (yield) % $= \dfrac{\text{Annual income}}{\text{Investment}}\times100$.
- Premium: $MV = NV + \text{premium}$; Discount: $MV = NV - \text{discount}$; at par: $MV = NV$.
Prerequisite
- Percentage and ratio (income vs investment); profit/loss on sale of shares.