Understanding Regular and Extra Dividends

Questions and Answers

What is a regular dividend characterized by?

It is an amount expected to be maintained barring major earnings collapse. (correct)

It is paid at the discretion of the company's shareholders.

It is guaranteed regardless of company performance.

It is often higher than the extra dividend amount.

Which statement correctly describes the nature of an extra dividend?

It is a predictable payment that will occur every year.

It serves as a bonus in addition to the regular dividend and is not guaranteed in the future. (correct)

It is typically based on the company's debt obligations.

It is paid annually and considered a contractual obligation.

How often can companies typically decide to pay dividends?

Monthly, quarterly, or biannually, but never less than annually.

Only once a year.

They can only pay dividends during profitable quarters.

Once, twice, or four times a year, depending on company performance. (correct)

Who has the authority to declare a dividend and determine its amount?

The board of directors of the company. Signup and view all the answers

What does 'ex-dividend' refer to in relation to dividend announcements?

The date on which a stock begins trading without the dividend included. Signup and view all the answers

What is the typical process for someone owning registered shares to receive dividends?

Payment cheques are mailed directly to the securities firm managing their account. Signup and view all the answers

What channel is used most often by companies to announce dividends?

Print media, press releases, and the company’s website. Signup and view all the answers

When are dividends typically announced to shareholders?

With a notice prior to the payment date. Signup and view all the answers

What happens when shares are registered in street certificate form regarding dividend payments?

Payments are made to the securities firm that manages the shares. Signup and view all the answers

What is a key characteristic of fixed-rate perpetual preferred shares?

They have no stated maturity date. Signup and view all the answers

What typically happens to the call price of fixed-rate perpetual preferred shares over time?

It declines to equal the issue price after five years. Signup and view all the answers

What is the typical nature of dividends for fixed-rate perpetual preferred shares?

They are fixed, non-cumulative, and dependent on board approval. Signup and view all the answers

How is the dividend rate for ABC Corporation Limited’s Class A Non-Cumulative Redeemable preferred shares expressed?

As an annual percentage of the issue price. Signup and view all the answers

What is the typical first call date for fixed-rate perpetual preferred shares?

Five years after the issue date. Signup and view all the answers

Which element is NOT a common feature of fixed-rate perpetual preferred shares?

A stated maturity date. Signup and view all the answers

In what manner do fixed-rate perpetual preferred shares typically pay their dividends?

Quarterly, based on board approval. Signup and view all the answers

What does the term 'non-cumulative' imply regarding the preferred shares' dividends?

Dividends are only paid if declared in that year. Signup and view all the answers

When do the call prices of fixed-rate perpetual preferred shares usually equal the issue price?

After five years post-issuance. Signup and view all the answers

What is the par value of ABC Corporation Limited’s preferred shares mentioned in the example?

$25 Signup and view all the answers

What is the primary purpose of stock indexes in the stock market?

To measure the performance of a portfolio against a benchmark Signup and view all the answers

How is the total market value of a stock calculated?

By multiplying the current price by the number of shares outstanding Signup and view all the answers

What does a float-adjusted index take into account while calculating index values?

Common shares available for public trading, excluding restricted shares Signup and view all the answers

What is the function of a stock index as a time series of numbers?

To calculate a percentage change over any period Signup and view all the answers

What does a percentage change calculation for a stock index typically compare?

The total market value at a base period to its current value Signup and view all the answers

In value-weighted stock indexes, what primarily influences the index's movement?

The total market capitalization of the stocks Signup and view all the answers

What is a key benefit of including preferred shares in a portfolio?

They can provide higher returns without increasing overall risk. Signup and view all the answers

How does interest rate risk affect fixed-rate preferred shares?

Their prices fall when interest rates rise. Signup and view all the answers

Which factor does NOT influence the sensitivity of preferred shares to interest rate fluctuations?

The market capitalization of the company. Signup and view all the answers

In what circumstance might floating-rate preferred shares increase in price?

When there is an expectation of higher future dividends. Signup and view all the answers

What happens to fixed-rate preferred shares with lower dividends and longer maturities during rising interest rates?

They fall more significantly in price. Signup and view all the answers

Why are floating-rate preferred shares considered less sensitive to interest rate changes?

They reset dividends based on prevailing interest rates. Signup and view all the answers

What type of harm do preferred shares most closely resemble?

The risks associated with fixed-income securities. Signup and view all the answers

What advantage do preferred shares offer compared to common shares?

Fixed dividends independent of profits. Signup and view all the answers

Which factor is NOT described as determining the sensitivity of preferred shares to interest rates?

Overall market trends. Signup and view all the answers

During a period of decreasing interest rates, what is expected to happen to fixed-rate preferred shares?

Their prices will increase. Signup and view all the answers

What is the dividend amount an investor would receive for owning 1,000 shares of GHI Ltd. if the quarterly dividend is $0.21875 per share?

$218.75 Signup and view all the answers

How is the monthly dividend for GHI Ltd.’s Series F Floating Rate preferred shares calculated if the average Canadian Bank Prime Rate is 4%?

$0.0625 per share Signup and view all the answers

What is the primary distinction between dividends and interest on a debt security?

Interest is mandatory; dividends are not Signup and view all the answers

What consequence may arise from failing to declare an anticipated preferred dividend?

Weakening of future borrowing power Signup and view all the answers

How often do shareholders of GHI Ltd.'s Series F preferred shares receive dividends?

Monthly Signup and view all the answers

What privileges do preferred shareholders have concerning dividend payments compared to common shareholders?

They get paid first before common shareholders Signup and view all the answers

Under what condition can the board of directors defer the declaration of preferred dividends?

If company earnings are insufficient Signup and view all the answers

What is the potential drawback of holding preferred shares compared to common shares?

Preferred shares may not offer capital appreciation Signup and view all the answers

If an investor has 1,000 preferred shares of GHI Ltd. trading at $24.75, what would be the total equity value of their investment?

$24,750 Signup and view all the answers

Study Notes

Regular and Extra Dividends

Regular dividends are specified payments made annually, indicating stability in earnings barring major collapses.
Extra dividends are additional payments, usually paid at the end of the fiscal year, considered bonuses and not guaranteed for future years.

Declaring and Claiming Dividends

Companies can pay dividends once, twice, or four times a year, determined by the board of directors, who also set the amount and payment dates.
Dividend payments are not obligatory; they depend on the board's declaration.
Registered shareholders receive payment cheques directly, while those with street certificates get payments through their brokerage firms.

Ex-Dividend and Cum Dividend

Dividend declarations are announced through various media, including print and online channels.
An example: ABC Inc. announced a dividend of $0.75 per share for shareholders of record by a set date.

Types of Preferred Shares

Changes in the preferred share market often respond to regulatory shifts and investor demands, prompting new structures to meet needs.

Fixed-Rate Perpetual Preferred Shares

Fixed-rate perpetual preferred shares feature a fixed quarterly dividend without a maturity date, redeemable at established dates.
Example: ABC Corporation Limited’s preferred shares offer a 5.25% annual dividend, presenting diversification benefits when added to a portfolio of common stocks and bonds.

Risks of Investing in Preferred Shares

Preferred shares carry risks akin to fixed-income securities, including interest rate risk.
As interest rates rise, prices of fixed-rate preferred shares typically decline due to decreased relative value of fixed dividends.
Floating-rate preferred shares adjust dividends based on current interest rates, making them less sensitive to interest fluctuations.

Stock Indexes

Stock indexes facilitate performance measurement for portfolios and can be used in index mutual funds or as underlying interests for various financial instruments.
Most stock indexes are value-weighted, calculated using market capitalization relative to a base period.

Did You Know?

S&P market capitalization-weighted indexes often use float-adjustment to reflect shares available for public trading, excluding those held by major stakeholders.
Daily calculations derive the total market value of stocks in the index, comparing it to the initial base value for percentage change determination.

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Description

This quiz explores the concepts of regular and extra dividends paid by companies on common shares. Learn about the significance of regular dividends and how extra dividends function as bonuses for shareholders. Test your knowledge on this important aspect of corporate finance.