Pro Rata
“Pro rata” is a Latin term that means “in proportion.” In finance and business, it is used in several contexts to indicate a proportionate allocation.
For example, dividends might be paid out on a pro rata basis. If you own 10% of the shares in a company, you would receive 10% of the total dividends paid out.
Another common example is in insurance, where a policy may be cancelled, and the premium is returned on a pro rata basis for the unused portion of the policy term. If you cancelled halfway through the term, you would get half of the premium back.
In legal contexts, “pro rata” can refer to the equal distribution of a loss between all interested parties. If a business goes bankrupt and is liquidated, its remaining assets are divided pro rata among its creditors, meaning each creditor receives a portion equal to its share of the company’s total debt.
Example of Pro Rata
Let’s use the concept of pro rata in the context of company dividends as an example:
Imagine a company, MegaCorp, declares a dividend of $1 million to its shareholders. The company currently has 10 million shares outstanding.
If you, as an individual investor, own 50,000 shares in MegaCorp, you can calculate your portion of the dividends on a pro rata basis.
The pro rata share of the dividend would be the total dividend amount divided by the total number of shares, which is $1 million / 10 million shares = $0.10 per share.
As an owner of 50,000 shares, your pro rata dividend payout would be $0.10 * 50,000 shares = $5,000.
So, you would receive $5,000 from the $1 million in dividends declared by MegaCorp, based on your pro rata ownership of the company’s total shares. This is how pro rata works in the context of dividends. The same principle can be applied to other contexts such as the distribution of assets in a liquidation or the allocation of costs.
