Calculation Procedure:
- L/st the annual dividends obtainable
The table below shows the dividend that can be expected under plan A.
Investment, $ Annual dividend, $ Dividend rate, %
1000 300 30.0
2000 540 27.0
3000 720 24.0
4000 900 22.5
5000 950 19.0
6000 1020 17.0
7000 1220 17.4
8000 1300 16.3
- Construct a dividend-investment diagram
Figure 7 shows the dividend-investment diagram for this situation. Points A to H repre-
sent the sets of values under plan A. The slope of a line connecting any two points repre-
sents the rate of return on the incremental investment. For example, the slope of line EG =
$270/$2000 = 0.135, or 13.5 percent represents the rate obtained on the $2000 investment
added in going from E to G, Fig. 7.
- Determine the investments to make
Draw line OJ, Fig. 7, having a slope of 10 percent, the dividend rate under plan B. Next,
Amount invested, in units of $1000
FIGURE 7. Dividend-investment diagram.
Annual
dividend
