ACCA Financial Management (F9) Certification Practice Exam

What does the 'dividend policy' determine?

1. The amount of dividends to reinvest

2. The amount of dividends to pay out to shareholders

3. The timeline for dividend payments

4. The method for issuing dividends

The correct answer is: The amount of dividends to pay out to shareholders

The dividend policy primarily focuses on the amount of dividends to be paid out to shareholders. This policy is crucial as it directly impacts the distribution of a company's profits among its investors. Companies must decide how much of their earnings to return to shareholders in the form of dividends and how much to retain for reinvestment into the business. This decision-treats shareholders' expectations for returns on their investment, balancing immediate income needs against long-term growth potential. The chosen level of dividends can influence the company's stock price, investment appeal, and financial strategy, indicating how the management views the trade-off between paying out cash to shareholders and reinvesting in the company for future growth. While other aspects such as the reinvestment of dividends, the timing of payments, and the method of distributing dividends (cash versus stock) are important considerations, they fall under broader financial strategies and operational decisions, rather than defining the core of dividend policy itself.