Question #23
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 10
Status: Unattempted
Correct Answer: B
Question
When a firm pays a cash dividend, the dividend payment is most likely to:
Answer Choices:
A. cause financial leverage ratios to increase
B. have no impact on financial leverage ratios and liquidity ratios
C. cause liquidity ratios to increase
Explanation
All else equal, the result of a cash dividend is that financial leverage ratios (such as the
debt-to-equity ratio) should increase, while liquidity ratios (such as the cash ratio) should
decrease. Cash dividends reduce assets (as cash is paid out) and reduce shareholders'
equity (by lowering retained earnings). (Stock dividends, on the other hand, do not impact
liquidity ratios or financial leverage ratios.)