Certified Financial Management Specialist Practice Exam

Why might a company choose to implement a no dividend policy?

1. To maximize short-term shareholder income

2. To channel profits into expansion or development

3. To discourage long-term investments

4. To pay down all existing debts immediately

The correct answer is: To channel profits into expansion or development

A no dividend policy is often adopted by companies that prioritize reinvesting their profits back into the business to fuel growth and expansion. By opting not to distribute earnings as dividends, the company can allocate those funds toward new projects, research and development, or other capital expenditures intended to increase the company's market share, improve efficiencies, or innovate its product offerings. This approach is particularly common among young, rapidly growing companies or those operating in competitive industries where maintaining a strong cash position is crucial to taking advantage of new opportunities. This strategy is grounded in the belief that by reinvesting profits into the business, the company can generate higher long-term returns for shareholders compared to the returns from dividend payments. In this context, shareholders may appreciate the potential for increased stock value over time, which can ultimately lead to greater wealth creation than receiving immediate cash payments through dividends.