Prepared by:Mathematics Department

DIVIDENDS & SHARES

¥ There can be many people who own a small part of a large company that is listed on the stock exchange.

¥ These small parts are known as shares. People (called investors or shareholders) who buy (or invest in) shares hope that the value of the company (and therefore their shares) will increase so they can be sold as a profit.

Investing in Shares

Buying of Shares

£ Shares are often bought through a stockbroker, at the stock exchange or over the Internet. If bought through stockbroker, a commission called a brokerage is usually charged. The brokerage can be a percentage of the value of each sale or the same (flat) rage per transaction.

Dividends

£ If a company makes a profit, all the shareholders of that company receive a part of the profit in the form of a dividend payment. Dividends are generally calculated on the face value of each share and stated as a percentage. The yield from such investments is calculated as follows:

YIELD

£ Yield = (Return from money invested / Amount of money invested) x 100%.

£ The amount of money invested in calculated using the market value of the shares.

Example 1:

What dividend will an investor receive from 4000 ordinary shares with a face value of $1.30 and a market value of $2.70 if the dividend rate is 20%?

Dividend is calculated using the face valueTherefore 20% of $1.30 multiplied by 4000 shares = 0.20 x $1.30 x 4000 = $1040

Example 2:Jennifer buys 3500 shares in Moo Milk where the face value is 75 cents per share and the market value is $2.10. Moo Mile pays a 15% dividend to its shareholders.

Calculate the yield on Jennifer’s investment.

Example 2…..continueAmount = $2.10 x 3500 = $7350.

Dividend = 15% of $0.75 multiplied by 3500 shares = 0.15 x $0.75 x 3500 = $393.75Yield = x 100% = 5.36 %(to 2 decimal places)

Tutorials

1. What dividend will Rodney receive from 6000 ordinary shares that have a face value of $0.80 and a market value of $1.15 if the dividend rate is 12 ½%?

2. Sarah buys 3000 shares in Fresh OJ which have a face value of $0.60 per share and a market value of $1.40. Fresh OJ pays an 8 % dividend to shareholders. What is Sarah’s yield on this investment?

Tutorial……continue.3. How many shared did Mr Chen buy if the market value of the shares was $2.25 and he paid $5760?

4. Jay bought 4500 shares in Phoney (a telephone company) at $6.50 each. She purchased these shared through a broker and paid a brokerage fee of 6% of the share price per share. The face value of the shares was $4.80.

More…..on tutorial.

a) What was the total cost of the shares bought by Jay?

b) Jay kept the shares for three years before selling them for $9.20 each. During each of those three years, Phoney declared a 15% dividend on all shares.What was Jay’s total dividend return on the shares ?

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