ACCA Financial Management (F9) Certification Practice Exam

What are scrip dividends?

1. Dividends paid in cash

2. Dividends paid by issuing additional shares

3. Dividends that are reinvested automatically

4. Dividends paid according to shareholder preference

The correct answer is: Dividends paid by issuing additional shares

Scrip dividends refer specifically to a form of dividend payment where a company issues additional shares to its existing shareholders instead of cash. This approach allows shareholders to receive their dividends in the form of new equity shares, essentially diluting the ownership percentage but allowing the company to retain more cash for other uses like reinvestment or strengthening the balance sheet. This method can be particularly appealing to companies that may need to conserve cash or that prefer to invest profits back into the business rather than pay them out in cash. It also offers shareholders an opportunity to increase their holdings in the company, which can lead to greater long-term returns if the company's stock value appreciates. In contrast, other options presented do not accurately reflect the definition of scrip dividends. Cash dividends are straightforward and involve actual cash payments. Automatic reinvestment of dividends typically refers to a dividend reinvestment plan (DRIP), where cash dividends are automatically used to purchase additional shares, but it doesn’t involve issuing shares specifically as a dividend. Lastly, dividends paid according to shareholder preference suggest flexibility that standard dividend practices do not usually accommodate, as dividends are typically declared by the company's board of directors based on the overall financial strategy, rather than directly according to individual shareholder preferences.