Certified Financial Management Specialist Practice Exam

What is the term for a distribution of a portion of a company's earnings to its shareholders?

1. Reinvestment

2. Dividends

3. Revenue

4. Capital Gains

The correct answer is: Dividends

The term for a distribution of a portion of a company's earnings to its shareholders is dividends. Dividends represent a way for companies to return profits to their investors as a reward for their investment, signaling the company’s profitability and financial health. This distribution is typically made in cash, although it can also be in the form of additional shares. Investors may appreciate dividends as they provide a regular income stream, which can be particularly attractive in comparison to stocks that reinvest all earnings back into the company. Dividend announcements can also influence stock prices, as they reflect a company's confidence in its ongoing profitability. Reinvestment refers to the practice of using profits to invest back into the company rather than distributing them to shareholders, which is a different concept from dividends. Revenue, on the other hand, refers to the total income generated by a business before any expenses are deducted, and capital gains are the profits realized from selling an asset for more than its purchase price, which is also distinct from dividends.