Edexcel A-Level Business Theme 1 Practice Test

In business, choosing between paying dividends and reinvesting profits is an example of?

Sunk cost Trade-off Fixed cost Variable cost

Correct Answer:

Trade-off

Explanation:

This is about making a trade-off between competing uses of profits. When you decide between paying dividends and reinvesting profits, you’re weighing two valid goals: rewarding shareholders now with cash or funding future growth through reinvestment. Each choice has an opportunity cost—the benefit you miss by not choosing the other option. Paying dividends means giving up some reinvestment potential; reinvesting means forgoing immediate shareholder payouts. This isn’t about past costs (sunk costs) or about costs that depend on production levels (fixed or variable costs). It’s the balancing act between alternative uses of profits, i.e., a trade-off.

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