Certified Financial Management Specialist Practice Exam

What is a primary characteristic of companies with a no dividend policy?

1. They prioritize immediate shareholder returns

2. They aim to reinvest profits for growth

3. They expect stable annual dividends

4. They focus on paying off existing debts only

The correct answer is: They aim to reinvest profits for growth

Companies with a no dividend policy typically prioritize reinvesting their profits into the business rather than distributing them to shareholders as dividends. This approach is based on the belief that reinvestment can lead to higher growth opportunities through projects that generate a return on investment, ultimately increasing the company's value and benefitting shareholders in the long run. By retaining earnings for reinvestment, these companies often aim to fund research and development, expand operations, or pursue acquisitions, which may contribute to enhanced market competitiveness and higher future earnings. This strategy aligns with growth-focused objectives rather than immediate cash returns to shareholders, distinguishing it from those organizations that might provide steady dividends or prioritize the repayment of debts.