ACCA Advanced Financial Management (AFM) Practice Exam

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What does a dividend reinvestment plan (DRIP) allow shareholders to do?

Withdraw their dividends as cash
Reinvest dividends in shares of the company stock
Convert dividends into bonds
Sell dividends on the market

The correct answer is: Reinvest dividends in shares of the company stock

A dividend reinvestment plan (DRIP) is a program that enables shareholders to use the cash dividends they earn from their shares to purchase additional shares of the company's stock, rather than receiving the dividends in cash. This approach not only helps shareholders to accumulate more shares over time, potentially increasing their investment's value due to compounding but also supports the company by providing it with reinvested capital. When shareholders participate in a DRIP, they typically buy shares at a discounted price or without paying any brokerage fees, which adds additional value to their investment. This practice is particularly enticing for long-term investors who believe in the company’s growth potential and aim to increase their ownership stake without incurring additional cash outflows. The other options do not accurately describe the primary function of a DRIP, making the correct answer distinctly focused on reinvesting dividends in shares of the company stock.