ACCA Financial Management (F9) Certification Practice Exam

Which of the following describes the Dividend Yield calculation?

1. (Dividend per Share / Market price per Share) x 100

2. (Market price per Share / Dividend per Share) x 100

3. Dividend per Share / Total Shares Outstanding

4. Dividend per Share + Market price per Share

The correct answer is: (Dividend per Share / Market price per Share) x 100

The calculation for Dividend Yield is indeed represented by the formula: (Dividend per Share / Market price per Share) x 100. This formula effectively measures the return on investment from dividends relative to the price of the stock. By dividing the annual dividend payment to shareholders by the market price of the stock, you determine what percentage of the stock's price is being returned to shareholders as dividends. This is a critical measure for investors who seek income from their investments, as it provides a direct insight into how much they can expect to earn from dividends in relation to their investment in the company's shares. The use of this formula assists investors in comparing the dividend-paying ability of different shares in the market. A higher dividend yield can indicate a more attractive investment for those focused on income, while a lower yield might suggest that either the stock price is high relative to dividends or that the company is reinvesting more profits into growth rather than paying them out as dividends. Understanding this calculation is crucial for evaluating potential investments, especially in income-focused strategies, and aids in making informed decisions based on a company's dividend performance relative to its stock price.