Question

Which investment gives a better return, assuming the face value of shares to be Rs. 10?
A. 5% stock at 75, subject to 30% income tax
B. 4% stock at 90, tax free

• A. B
• B. A
• C. Both A and B
• D. None of these

Answer 1

The Correct Option is B

To determine which investment provides a better return, we need to calculate the effective return for each option.

Option A: 5% stock at 75, subject to 30% income tax

The dividend per share is 5% of the face value, Rs. 10, which equals Rs. 0.5.

The market price of the share is Rs. 75.

The effective return before tax is:

$\frac{0.5}{75}\times 100=0.6667\%$

After 30% income tax, the dividend is:

$0.5\times (1-0.3)=0.35$

The effective return after tax is:

$\frac{0.35}{75}\times 100=0.4667\%$

Option B: 4% stock at 90, tax free

The dividend per share is 4% of the face value, Rs. 10, which equals Rs. 0.4.

The market price of the share is Rs. 90.

The effective return is:

$\frac{0.4}{90}\times 100=0.4444\%$

Conclusion: Option A gives a higher effective return (0.4667%) than Option B (0.4444%). Therefore, investment A offers a better return.