ACCA Financial Management (F9) Certification Practice Exam

What is the formula for calculating Total Shareholder Return?

1. (Dividend + Change in Share Price) / Share price at the start of the year

2. (Share price at end of year - Share price at start of year) / Share price at start of year

3. Change in Earnings Per Share / Number of Shares

4. (Dividend / Share price at start of the year) + Change in Share Price

The correct answer is: (Dividend + Change in Share Price) / Share price at the start of the year

The formula for calculating Total Shareholder Return (TSR) accurately encapsulates the overall return that shareholders receive from their investment in a company. It combines the income received from dividends with the capital gains resulting from an increase in share price. The first part of the correct formula involves adding the dividends received during the year to the change in share price over the period. Dividends represent a cash return to shareholders, while the change in share price indicates an increase in the value of their investment. The sum of these two components provides a comprehensive view of the return. This total return is then divided by the share price at the start of the year. This step normalizes the return relative to the investment amount, allowing for a percentage representation of the return on investment. In contrast, the other options either focus solely on price changes without accounting for dividends or mistakenly calculate elements that are not necessary for determining the total return to shareholders. Therefore, the chosen formula accurately reflects all aspects of shareholder return, making it the correct answer for calculating Total Shareholder Return.