What effect does declaration and payment of cash dividend have on total liabilities and debt to equity ratio?

Ann asked:


A. No effect on total liabilities, increase in debt to equity ratio
B.Increase in total liablities, increase in debt to equity ratio
C.No effect on total liabilities, decrease in debt to equity ratio
D.Decrease in total liabilities, decrease in debt to equity ratio

My answer is D. That is correct? I know B is not an answere.

Roland

Tags: Cash Dividend, Debt Ratio, Debt To Equity Ratio

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One Response to “What effect does declaration and payment of cash dividend have on total liabilities and debt to equity ratio?”

1. capwest5a Says:
   March 30th, 2009 at 11:06 am

   Jacob

   I think it’s answer A.

   The declaration of a cash dividend creates a liability, but then the payment of the dividend negates that liability.

   The payment of the dividend also reduces equity, so debt to equity ratio increases.

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