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Up4
Which of the following statements are most likely true regarding cash dividends?
I. Cash dividends decrease the current ratio.
II. Cash dividends decrease the debt-to-assets ratio.
III. Cash dividends increase the debt-to-equity ratio.
- A. I & III only
- B. II & III only
- C. I, II & III
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Up2
The spoiler functionality is pretty cool by the way. props to the 300 hours team!
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Up1
ANSWER SPOILER ALERT:
I got it right (through knowing that II is wrong), but I don’t understand why debt-to-equity will be increased with cash dividends. -
Up1
The correct answer is A.
Declaring cash dividends decreases ‘cash’ and ‘equity’. Therefore, it decreases the current ratio (Current assets / Current liabilities), and increases the debt-to-asset ratio (Total debt / Total assets) and the debt-to-equity ratio (Total debt / Total equity).
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