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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    • Matt_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
    • dollface
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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.

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

    • Matt_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).

    • Matt_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!

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