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Dividend per ordinary share, 500 shares, tax 20%

Short answer

After deducting interest (Rs 3,600) and tax (20%), EAT is Rs 29,120. Subtracting preference dividend (Rs 4,500) leaves Rs 24,620 for ordinary shareholders, giving a dividend per share of Rs 49.24.

The capital structure of a firm consists of 500 ordinary shares @ Rs 100/share and Rs 30,000 preference share @ 15% interest per year. The firm has a loan of 30,000 @ 12% per year. Earnings before interest and tax is 40,000. Determine the dividend provided to each share for ordinary shareholders if tax rate is 20%.

Data

  • 500 ordinary shares at Rs 100 = Rs 50,000
  • Preference shares Rs 30,000 at 15%
  • Loan Rs 30,000 at 12%
  • EBIT = Rs 40,000; tax = 20%

Assumption: the whole profit available to ordinary shareholders is paid as dividend (so dividend per share = EPS).

Interest=30,000×12%=3,600EBT=40,000−3,600=36,400Tax=20%×36,400=7,280EAT=36,400−7,280=29,120Preference dividend=30,000×15%=4,500Earnings for ordinary shareholders=29,120−4,500=24,620Dividend per share=24,620500=49.24\begin{aligned} \text{Interest} &= 30{,}000 \times 12\% = 3,600\\ \text{EBT} &= 40{,}000 - 3,600 = 36,400\\ \text{Tax} &= 20\% \times 36,400 = 7,280\\ \text{EAT} &= 36,400 - 7,280 = 29,120\\ \text{Preference dividend} &= 30{,}000 \times 15\% = 4,500\\ \text{Earnings for ordinary shareholders} &= 29,120 - 4,500 = 24,620\\ \text{Dividend per share} &= \frac{24,620}{500} = 49.24 \end{aligned}

Answer: Dividend per ordinary share = Rs 49.24.

✓ Answer checked by Claude Opus 5.5 (high effort)

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