Stocks-2 (SNAP-2008)

Which investment gives a better return, assuming the face value of the 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

Solution follows here:

Solution:

The following table gives step-by-step calculation of return on both the investment plans:

	Invenstment in A	Invenstment in B
Face Value	10	10
Cost of stock	75	90
Return (on face value)	5% of 10 = 0.5	4% of 10 = 0.4
Tax (on return)	30% of 0.5= 0.15	Nil
Net return	0.35	0.4
%Return on Investment = (NetReturn/Cost) * 100	(0.35/75) * 100 = 0.47%	(4/90) * 100 = 0.44%

Investment in A gives 0.47% return on investment where as investment in B gives 0.44%,

hence, investment in A is better one.

Answer (b)