Question

3. in genral practice, dividends tend to

a. be more stable than earnings

b. fluctuate more widely than earnings

c. be a lower percentage of earnings for mature companies

d. be set as a fixed portion of earnings

e. change every year to reflect changes in earnings

6. share buy backs can be a good idea if:

a. the company has a suplus cash to return to shareholders

b. it can create temporary increases in share price

c. the company is looking to increase the dividend ratio

d. investors are content with current returns

Answer 1

3. In general practice, dividends tend to be more stable than earnings

Therefore correct answer is option a. be more stable than earnings

Dividends tend to be more stable than earnings because it is not only a payout to the investors but also a signal to the market to strengthen long term investors' confidence in the company. Therefore companies try their best to make it as stable as possible or increasing to give positive signals to the market.

6. Share buy backs can be a good idea if the company has a surplus cash to return to shareholders

Therefore correct answer is option a. The company has a surplus cash to return to shareholders

There are various reasons behind share buy backs of a company for example; it can reduce the company’s cost of capital, it can benefit the company from temporary undervaluation of the stock, through buy back company can consolidate ownership etc. Therefore if the company has a surplus cash to return to shareholders, they can opt for share buy backs from the shareholders.