ACCA Advanced Financial Management (AFM) Practice Exam

What is a stock dividend?

1. Cash payment to shareholders

2. Share conversion into debt

3. Giving people shares instead of cash

4. Reduction of share price

The correct answer is: Giving people shares instead of cash

A stock dividend is a method of distributing additional shares of a company's stock to its existing shareholders, rather than paying out cash. This approach allows shareholders to receive a reward for their investment without the company incurring the immediate cash outlay that would come with a cash dividend. By issuing stock dividends, companies can retain more cash for operational or growth purposes while still providing value to their shareholders. This method can also be attractive in certain circumstances; for example, if a company is currently low on cash but wants to show investors that it is performing well. Issuing additional shares can enhance perceived value and encourage shareholder loyalty. The other options present different financial concepts: cash payments represent a direct return on investment to shareholders, share conversion into debt is a process unrelated to dividends, and a reduction of share price reflects market dynamics rather than a direct action involving shareholder distributions. Thus, the correct understanding of stock dividends centers on the issuance of additional stock rather than cash or other mechanisms.