CFA CFA Level 1 CFA Level 1 Question of the Week – Corporate Finance

CFA Level 1 Question of the Week – Corporate Finance

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    • Avatar of Matt_AnalystPrepMatt_AnalystPrep
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        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
      • Avatar of Matt_AnalystPrepMatt_AnalystPrep
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          dollface said:
          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.

          Nice functionality, you are right! Eliminating wrong answers will be key in your CFA level 1 exam!

        • Avatar of dollfacedollface
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            The spoiler functionality is pretty cool by the way. props to the 300 hours team!

          • Avatar of dollfacedollface
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              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.

            • Avatar of Matt_AnalystPrepMatt_AnalystPrep
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                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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