General Education Development (GED) Practice Exam

Which of the following is not true of stock dividends?

1. They are usually taxable

2. They are offered voluntarily by companies in order to make their stock more attractive

3. Their amount and frequency are determined directly by shareholders at large

4. They may be discontinued or reduced at any time

The correct answer is: Their amount and frequency are determined directly by shareholders at large

Stock dividends are a way for companies to distribute portions of their profits to shareholders without reducing their cash reserves by using stock instead. The correct answer points to the fact that shareholders do not directly determine the amount and frequency of dividends. Typically, a company's board of directors decides the dividend policy, including how much to pay and when. While shareholders might express their preferences or vote on specific issues, the actual decision rests with the company's management. This means that shareholders at large have no direct control over dividend declarations, making this statement untrue in the context provided. In contrast, the other statements about stock dividends are accurate. Dividends are indeed usually taxable as income to the shareholders in the year they are paid. Companies offer dividends voluntarily as a strategy to attract and retain investors by providing a return on investment. Additionally, firms can freely decide to discontinue or lower dividends based on their financial performance or strategic goals, further demonstrating the board's control over this aspect of corporate finance.