Choose wisely. There is only one correct answer to each question.
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1.
What might put a dividend in jeopardy?
Excess debt. Manageable debt levels and steady free cash flows are important factors that help ensure a steady or increasing dividend.
2.
What is one thing that excess earnings would not pay for?
Dividends. Excess earnings don't exist until after dividends have been paid out.
3.
Amalgamated Widget has a payout ratio of 87%. This may indicate any of the following, except _______.
87% of dividends are guaranteed. The other two statements are possibly true--temporarily depressed earnings will inflate a firm's payout ratio, but 87% is a high number, and a firm that is paying out 87% of earnings probably doesn't have many reinvestment opportunities. However, the first answer--that 87% of dividends are guaranteed--is patently false. Dividends are never guaranteed.
4.
Given a quarterly dividend of $0.30 per share and a $27 stock price, what is the yield?
4.4%. Okay, we threw you a little bit of a curveball with that one. To obtain yield, we want to use the indicated (annualized) dividend rate. A $0.30 quarterly dividend should be multiplied by four before dividing by the stock price.
5.
Based on historical information, what might you expect a fair return to be for an established, dividend-paying stock?
Between 8% and 12%. Most established, dividend-paying companies would fall in a range between 8% and 12%.
