Question

Which of the following statements are true regarding dividends?

a. Stock dividends are sometimes referred to as capitalizing retained earnings.
b. A stock dividend commonly indicates management's confidence that the company is doing well.
c. All stock dividends (large and small) are recorded at the market value of the stock price as of date of declaration.
d. A stock dividend increases the number of outstanding shares.

Answer 1

Answer: b. A stock dividend commonly indicates management's confidence that the company is doing well.

Explanation: That a company's management is doing well and would continue to do well is often indicated by the distribution of dividends. As a result, it is an indication of confidence in the management of a company. This makes option b the only true statement regarding dividends. Dividends also play roles in keeping the price of stocks affordable.

In contrast, retained earnings are the cumulative net income (and loss) not distributed as dividends to the shareholders of a company while the date of declaration is the date the company directors vote to declare and pay dividends to shareholders thus creating a legal liability to the company's shareholders.