ACCA Advanced Financial Management (AFM) Practice Exam

What is one alternative method to distribute cash instead of using dividends?

1. Stock repurchases

2. Equity issuances

3. Retained earnings

4. Debt financing

The correct answer is: Stock repurchases

Stock repurchases serve as an alternative method for companies to distribute cash to their shareholders instead of paying dividends. When a firm repurchases its own shares, it buys back a portion of the outstanding shares from shareholders, reducing the number of shares available in the market. This action can lead to an increase in the value of the remaining shares, as earnings are distributed over a smaller number of shares, potentially boosting earnings per share (EPS). Additionally, stock repurchases can provide more flexibility for both the company and its shareholders. Unlike dividends, which are expected to be regular and predictable, stock buybacks can be executed at the company’s discretion, allowing firms to manage their cash reserves more effectively. Shareholders also benefit from the option to sell their shares back to the company, giving them a way to realize value from their investments without the tax implications that often accompany dividend payments. Other options such as equity issuances would not distribute cash but instead involve raising funds by selling new shares, which dilutes existing shareholders' ownership. Retained earnings refer to profits that are reinvested in the business instead of being distributed, thereby not serving the purpose of cash distribution. Debt financing involves borrowing funds, which does not relate to the distribution of cash to shareholders but