1.4.1 - DIVIDENDS

What is another way to say "dividend yield"?

Current Yield

What is another way to say "current yield"?

Dividend Yield

An investment's total return is a combination of what?

1. The dividend income 2. Price appreciation or decline over a given period.

TRUE OR FALSE? Stock dividends, like splits, are taxable.

FALSE Neither stock dividends or splits are taxable.

A company's dividend on its common stock is: A) specified in the company charter. B) determined by its board of directors. C) voted on by shareholders. D) mandatory if the company is profitable.

B) determined by its board of directors. A common stock's dividend payment and amount are determined by the company's board of directors. Reference: 1.4.1 in the License Exam Manual

TRUE OR FALSE? Cash dividends are taxed in the following year they are received.

FALSE They are taxed in the SAME year they are received.

How are cash dividends normally distributed?

By check if an investor holds the stock certificate. Automatically deposited to a brokerage account if the shares are held in street name.

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is A) 15% B) 2% C) 5% D) 10%

C) 5% The current yield formula is annual dividends per share divided by current market price. The dividends per share are $36 million / 20 million shares = $1.80 per share. Current yield is $1.80 / $36.00 = 5%. Reference: 1.4.1.3 in the License Exam Manual

A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 15%. B) 10%. C) 5%. D) 1%.

C) 5%. The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield). Reference: 1.4.1.3 in the License Exam Manual

Which of the following statements regarding the effects of a stock dividend is TRUE? A) New capital is channeled to the company. B) Net current assets are decreased. C) The market value of the stock is decreased. D) Capital surplus is reduced.

C) The market value of the stock is decreased. A stock dividend results in an increased number of outstanding shares, each with a lower value per share. The total value of stock outstanding is unchanged. There is no new capital generated from a stock dividend. Current assets are unchanged because there is no increase or decrease to the company's cash as a result of the stock dividend. Reference: 1.4.1.2 in the License Exam Manual

ABC's stock has paid a regular dividend every quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's: A) current yield per share has decreased. B) current yield per share has been unaffected. C) current yield per share has increased. D) yield to maturity has gone up.

C) current yield per share has increased. The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield. Stocks do not have a yield to maturity. Reference: 1.4.1.3 in the License Exam Manual

What are dividends?

Dividends are distribution of a company's profits to its stockholders.

TRUE OR FALSE? Investors who buy stock are always entitled to dividends.

FALSE Investors are entitled to dividends when the company's BOD votes to make such distributions.

What is street name?

Shares held in a brokerage account in the firm's name to facilitate payments and delivery.

TRUE OR FALSE? Stockholders are automatically sent any dividends to which their shares entitle them.

TRUE

How is the current yield calculated?

The annual dividend is divided by the current market value of a stock.

Roughly, how much is the annual dividend?

The annual dividend, roughly speaking, about four times the quarterly dividend.

What is a stock dividend?

The company issues shares of its common stock as a dividend to its current stockholders. It is when a company uses its cash for business purposes rather than to pay cash dividends.