Certified Financial Management Specialist Practice Exam

What are dividend payments?

1. Cash reinvested into the company

2. Cash distributed to shareholders from profits

3. Cash used for capital expenditures

4. Cash held for future investments

The correct answer is: Cash distributed to shareholders from profits

Dividend payments represent a distribution of a portion of a company's earnings to its shareholders. When a company generates profits, it can choose to reinvest that money back into the business or distribute it to its owners, which are the shareholders. By providing dividends, the company rewards its shareholders for their investment, offering them a return on their investment in the form of cash or additional shares. The decision to pay dividends is often contingent upon the company's profitability and cash flow. Options that refer to business reinvestment or cash for future use, while important financial activities, do not pertain to the concept of dividend payments. Since dividends specifically relate to sharing profits with shareholders, option B accurately captures the definition and purpose of dividends in corporate finance.