Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Dividends and Dividend Preferences

Financial Accounting

12. Stockholders' Equity

Dividends and Dividend Preferences

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Multiple Choice

Which of the following best describes homemade dividends, and why might investors choose to create them?

Homemade dividends occur when investors sell a portion of their own shares to generate cash flow, allowing them to create a personal dividend when a company does not pay one.

Homemade dividends are special dividends declared by a company in response to investor requests.

Homemade dividends are dividends paid by companies directly to investors in the form of additional shares rather than cash.

Homemade dividends refer to dividends that are reinvested automatically into purchasing more shares of the same company.

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Verified step by step guidance

Understand the concept of homemade dividends: Homemade dividends occur when investors sell a portion of their own shares to generate cash flow, effectively creating a personal dividend when a company does not pay one. This allows investors to tailor their cash flow needs independently of the company's dividend policy.

Analyze the options provided in the problem: Review each statement and compare it to the definition of homemade dividends. The correct description should align with the idea of investors selling shares to create cash flow.

Eliminate incorrect options: For example, the option stating that homemade dividends are special dividends declared by a company in response to investor requests is incorrect because homemade dividends are created by investors, not companies.

Further eliminate options that describe dividends paid in additional shares or reinvested dividends: These options refer to stock dividends or dividend reinvestment plans, which are distinct from homemade dividends.

Select the correct answer: The correct description is the one that matches the definition of homemade dividends, emphasizing the investor's role in selling shares to generate cash flow when a company does not pay dividends.