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 dividend policies will cause dividends per share to fluctuate the most?

A residual dividend policy

A constant dividend payout ratio policy

A stable dividend policy

A fixed dollar dividend policy

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Verified step by step guidance

Understand the concept of each dividend policy: A residual dividend policy bases dividends on the leftover earnings after all investment needs are met, leading to fluctuations. A constant dividend payout ratio policy ties dividends to a fixed percentage of earnings, causing variability with earnings changes. A stable dividend policy aims to maintain consistent dividends over time, regardless of earnings fluctuations. A fixed dollar dividend policy sets a specific dollar amount for dividends, ensuring stability.

Analyze the impact of earnings variability on each policy: Residual dividend policy is highly sensitive to earnings changes because dividends are determined after investment needs. Constant payout ratio policy fluctuates with earnings but less than residual policy. Stable and fixed dollar policies are designed to minimize fluctuations.

Compare the policies in terms of dividend fluctuation: Residual dividend policy will cause the most fluctuation because it directly depends on the leftover earnings after investment needs, which can vary significantly.

Consider the purpose of each policy: Residual dividend policy prioritizes investment needs over dividend stability, while other policies aim to provide more predictable dividends to shareholders.

Conclude that the residual dividend policy will cause dividends per share to fluctuate the most due to its dependence on variable earnings and investment requirements.