Question #25
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 10
Status: Unattempted
Correct Answer: B
Question
Which type of cash dividend is most likely to be declared by a cyclical firm during good times?
Answer Choices:
A. Stock dividend
B. Special dividend
C. Liquidating dividend
Explanation
Special dividends are used when favorable circumstances allow the firm to make a one-
time cash payment to shareholders, in addition to any regular dividends the firm pays.
Many cyclical firms (e.g., automakers) will use a special dividend to share profits with
shareholders when times are good but maintain the flexibility to conserve cash when
profits are down. Other names for special dividends include extra dividends and irregular
dividends.
Liquidating dividends occur when a company ceases to operate and distributes any equity
proceeds to shareholders. Stock dividends are paid out in shares of stock rather than cash
and are similar to stock splits.