# Pro-Rata

## What is 'Pro-Rata'

Pro rata is the term used to describe a proportionate allocation. It is a method of assigning an amount to a fraction according to its share of the whole. While a pro rata calculation can be used to determine the appropriate portions of any given whole, it is most commonly used in business finance.

## BREAKING DOWN 'Pro-Rata'

Some of the most common uses for pro rata calculations are to determine dividend payments due to shareholders, to determine the amount of premium due for an insurance policy that only covered a partial term, or to allocate the appropriate portion of an annual interest rate to a shorter time frame.

## Dividends

When a company pays dividends to its shareholders, each investor is paid according to his holding. If a company has 100 shares outstanding, for example, and issues a dividend of \$2 per share, the total amount of dividends paid will be \$200. No matter how many shareholders there are, the total dividend payments cannot exceed this limit. In this case, \$200 is the whole, and the pro rata calculation must be used to determine the appropriate portion of that whole due to each shareholder.

Assume there are only four shareholders holding 50, 25, 15 and 10 shares. The amount due to each shareholder is his pro rata share. This is calculated by simply dividing the ownership of each person by the total number of shares and then multiplying the resulting fraction by the total amount of the dividend payment.

The majority shareholder's portion, therefore, is 50/100 x \$200, or \$100. This makes sense because he owns half the shares and receives half the total dividends. The remaining shareholders get \$50, \$30 and \$20 respectively.