Ever wondered why companies hand out cash to shareholders? It’s not magic – it’s just maths!
💡 In Simple Words: A share is a tiny piece of a company that you can own. When the company makes profit, it may give some of that money back to you – that’s called a dividend.
What are Shares?
A share (also called a stock) represents a unit of ownership in a business. If a company has 1,000 shares and you own 10 of them, you own 1% of that company. Think of it like a pizza cut into slices – each slice is a share.
Types of Shares
In commercial maths you usually meet two kinds:
- Equity shares – give you voting rights and a claim on profits after all other obligations are met.
- Preference shares – usually don’t let you vote, but you get a fixed dividend before equity shareholders.
| Feature | Equity Shares | Preference Shares |
|---|---|---|
| Voting Right | Yes | No |
| Dividend | Variable, depends on profit | Fixed, set percentage |
| Risk | Higher – gets profit after preferences | Lower – gets dividend first |
| Conversion | Can be converted to preference in some companies | Usually cannot be converted |
Dividends – The Cash Bonus
A dividend is the share of profit that a company decides to give its shareholders. It’s like a thank‑you gift for investing your money.
How Dividend is Declared
The board of directors meets, looks at the profit, and announces a dividend rate (the percentage of profit to be paid). This decision is recorded in a dividend warrant – a formal notice.
Dividend per Share Formula
The key formula you’ll use in exams is:
Dividend per Share = Total Dividend ÷ Number of Shares
Where Total Dividend = (Dividend Rate % × Net Profit). Let’s walk through an example.
Worked Example
ABC Ltd. earned a net profit of ₹5,00,000 for the year. The board declares a dividend of 8 %. The company has issued 25,000 equity shares. Find the dividend per share.
- Calculate total dividend: 8 % of ₹5,00,000 = 0.08 × 5,00,000 = ₹40,000.
- Divide by number of shares: ₹40,000 ÷ 25,000 = ₹1.60 per share.
So each shareholder receives ₹1.60 for every share they own.
Quick Tips & Common Mistakes
- Always convert the dividend rate to a decimal before multiplying (8 % → 0.08).
- Use the same units for profit and dividend – don’t mix rupees with thousands.
- If the question mentions “pre‑emptive right”, remember it only affects the number of shares, not the dividend formula.
- Check whether the dividend is on equity shares only; preference shares have a fixed rate that is usually given separately.
- Round off only at the final step, not after each intermediate calculation.
📝 Likely Exam Questions
- Question: A company has a net profit of ₹12 lakhs and declares a 5 % dividend. It has 60,000 equity shares. Find the dividend per share.
Answer: Total dividend = 0.05 × 12,00,000 = ₹60,000. Dividend per share = 60,000 ÷ 60,000 = ₹1. - Question: Explain the difference between equity shares and preference shares in two points each.
Answer: Equity shares give voting rights and variable dividend; preference shares have no voting rights and a fixed dividend. - Question: If a firm pays a dividend of ₹2 per share on 15,000 shares, what is the total dividend paid?
Answer: Total dividend = ₹2 × 15,000 = ₹30,000. - Question: A company’s board decides to retain 70 % of profit and distribute the rest as dividend. Net profit is ₹8 lakhs and there are 40,000 shares. Find the dividend per share.
Answer: Dividend portion = 30 % of 8,00,000 = ₹2,40,000. Dividend per share = 2,40,000 ÷ 40,000 = ₹6. - Question: List three reasons why a company might choose not to pay any dividend in a particular year.
Answer: (i) To reinvest profit for expansion, (ii) to strengthen reserves for future uncertainties, (iii) because the profit is insufficient to meet a reasonable dividend.