Compare two investments after income tax Which is the better investment: (A) 4% stock at par with income tax at 5 paise per rupee (i.e., 5% tax) or (B) 4 1/2% stock at 110 free from income tax?

Introduction / Context:
Investment comparisons must use net yield—after considering both the purchase price relative to par and any taxes. One option pays tax-free dividends at a premium price; the other pays taxable dividends at par. We must compute net yields to compare fairly.

Given Data / Assumptions:

• Option A: 4% stock at par; income tax = 5 paise per rupee = 5% tax on dividend.
• Option B: 4.5% stock at 110; tax-free.
• No brokerage or other costs.

Concept / Approach:
Net yield for A = 4% * (1 − 0.05) = 3.8% (since bought at par, yield equals net dividend rate). Net yield for B = (4.5 / 110) * 100 ≈ 4.0909% (premium reduces yield, but no tax). Compare 3.8% vs ~4.09%.

Step-by-Step Solution:
Option A net yield = 4 * 0.95 = 3.8%.Option B yield = 4.5/110 * 100 = 0.040909... * 100 = 4.0909...% ≈ 4.09%.Thus, Option B provides a higher net return.

Verification / Alternative check:
Even if small rounding differences are used, B remains above A: 4.09% > 3.8%. Hence B is superior financially under the stated assumptions.

Why Other Options Are Wrong:
Option A yields less after tax; “Both are equally good” or “Cannot be determined” are incorrect because sufficient data are given; “Neither is attractive” is subjective and not a quantitative comparison.

Common Pitfalls:
Forgetting to apply tax to the dividend for A or forgetting to divide the dividend by the premium price for B. Always compute net yield = (net dividend / price) * 100.

Final Answer:
4 1/2% at 110 (tax-free)