Choose wisely. There is only one correct answer to each question.
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1.
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.
2.
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.
3.
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.
4.
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%.
5.
What is one thing that excess earnings would not pay for?
Dividends. Excess earnings don't exist until after dividends have been paid out.
