CFA Practice Question
The drawbacks of dividend yield approach are:
II. Dividends are only part of the total returns.
III. Dividends are less stable than free cash flows as management can decide a company's dividend policy.
IV. The argument about the relative safety of dividends presupposes that the market prices reflect in a biased way differences in the relative risk of the components of return.
I. Dividends paid now displace earnings in all future periods.
II. Dividends are only part of the total returns.
III. Dividends are less stable than free cash flows as management can decide a company's dividend policy.
IV. The argument about the relative safety of dividends presupposes that the market prices reflect in a biased way differences in the relative risk of the components of return.
Correct Answer: I, II and IV
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan2 | Is III correct? |
| vladas | III is not correct. The statement is even inconsistent. Company´s div policy can maintain dividends stable as opposed to FCF. |
| HenryQ | Can anyone explain IV? |
| prabhur08 | Regarding IV: The components of returns on a stock are: 1) Dividend 2) Capital Gains Efficient market theory says that dividend policy does not impact the value of the stock. However by using dividend yield to compare stocks, the underlying assumption is that investors value dividends differently from capital gains. |