ACCA Advanced Financial Management (AFM) Practice Exam

What distinguishes a special cash dividend from a regular cash dividend?

1. It is a smaller payment

2. It is a one-off extra payment

3. It is paid to select shareholders only

4. It is paid only once a year

The correct answer is: It is a one-off extra payment

A special cash dividend is characterized as a one-off extra payment made by a company to its shareholders, distinct from regular cash dividends that are typically scheduled and predictable. This type of dividend is often declared when a company has excess cash that it does not need for immediate operational expenses or future investments, allowing it to share surplus funds with shareholders as a special reward or incentive outside the usual dividend distribution schedule. Unlike regular dividends, which are paid on a consistent basis (quarterly or annually) and expected by shareholders as part of their income, a special cash dividend is not part of the company’s regular dividend policy. It can occur due to various circumstances such as a completion of a significant asset sale or substantially increased profits that are not expected to recur. As such, its nature as a one-time distribution sets it apart from routine dividend practices. The focus on a one-off nature clarifies why this option is accurate and highlights the unique circumstances under which such payments occur.