Chartered Financial Analyst (CFA) Level 1 Practice Exam

What is the calculation for dividends per share?

1. EBIT / Average total capital

2. FFO / Total debt

3. Dividends Paid / Number of Shares Outstanding

4. CFO / Capital expenditures

The correct answer is: Dividends Paid / Number of Shares Outstanding

The calculation for dividends per share is determined by dividing the total dividends paid by the number of shares outstanding. This metric provides investors with a clear understanding of the amount of profit that is distributed to each share of stock, reflecting the company's ability to return capital to its shareholders. By using this formula, one can easily gauge the level of income an investor can expect to receive from holding shares of a company, which is crucial for assessing the attractiveness of a stock as an investment. The other options presented relate to different financial metrics and analyses. For example, EBIT divided by average total capital is a calculation used to assess operational efficiency, while funds from operations (FFO) divided by total debt is typically used to evaluate a company's ability to handle its debt obligations, often in real estate contexts. Finally, cash flow from operations (CFO) divided by capital expenditures measures how effectively a company generates cash relative to its investment in capital assets. Each of these calculations serves distinct purposes, but none specifically target the calculation of dividends per share.