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Written By:
Lisa Borga

## What Is Pro-Rata?

Pro-Rata is a Latin phrase that essentially translates to “in proportion.”

It is used to describe when a process will allocate value in a quantity measured proportionally to another sum.

This term is often used interchangeably with the term “pro-rated” in North America.

## How Pro-Rata Is Used

Pro-Rate means the division of something that is a whole.

Though often this means to divide something into equal shares, this is not always the case.

What it does mean is that every piece will be proportional to something else.

This is a particularly useful concept when the exact value of something is difficult to determine but can be easily provided in proportion to something else.

Pro-rata is very often used to calculate dividends per shareholder in which every investor would be paid in relation to their holdings in the company.

This is also often used to calculate the amount of interest that is earned off of an annual investment for a shorter period of time.

## Pro-Rata Formula

In order to calculate a pro-rata share, you will need to know the total amount which you want to calculate a pro-rata amount and the criteria by which you want to calculate it.

This criterion could be the number of shares owned in a company, the number of hours worked during a pay period, or any number of other criteria.

Take the portion that you want to calculate for, then divide it by the total, and then multiply this decimal amount by the sum which you want to find a pro-rata share of.

Pro-Rata Amount = Total / Criteria * Share To Be Found

## Examples of Pro-Rata

Pro-rata is useful for many different business and financial activities.

For example, consider a mortgage payment which is adjusted every month to account for changing amounts of principal and interest.

The payment will always be the same every month, but as the payments are made, the quantity allocated to the principal and the portion allocated to interest change every month.

Perhaps the most classic example of pro-rata is calculating dividend payments.

Pro-rata is extremely important for this because dividends are paid per share, and shareholder’s payments will be based on the proportion of shares they possess.

Let’s say that the 123 Corporation announces \$500,000 in cash dividend to be paid out for all of their outstanding shares.

The corporation has 200,000 shares outstanding.

To determine the amount to pay out per share, the formula is:

Per Share Dividend = Total Dividend Amount/Total Number of Outstanding Shares

So, to find the per-share amount for the above example, take \$500,000/200,000.

This will give you a per-share amount of \$2.50 per share.

To calculate the amount earned by any individual investor, the number of shares held by an individual would be multiplied by the amount per share.

### Everyday Uses for Pro-Rata

Even for those who are not investing in the financial markets, you will likely encounter pro-rata in your everyday life.

For example, consider that you are renting out a room of your home, and the person renting it moves in halfway through a month.

This means that you will need to provide a proportional amount of the rent compared to the whole month.

If the payment for a month is \$1,000 and the tenant spent 15 out of the 30 days in the month, then to calculate it, we would take 15 divided by 30 to get 0.5.

Then, multiply this by the \$1,000 to find the tenant owes you \$500.

The concept of pro-rata is invaluable when it comes to allocating parts of a whole in proportion to a given measurement.

This concept is used each and every day by many businesses and individuals alike in order to allocate value

## Key Takeaways

• When something is distributed pro-rata, it means that proportional shares were given.
• Pro-rata refers to performing or distributing something proportionally.
• The concept of pro-rata or pro-rating is used in many different areas, from business activities to everyday life.

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1. Cornell Law School "20 CFR § 416.1133 - What is a pro rata share of household operating expenses" Page 1 . December 6, 2021

2. Cornell Law School "Pro rata" Page 1 . December 6, 2021