CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

The drawbacks of dividend yield approach are:

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.
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