Question

If a company decides to increase its dividend payments policy what will be the impact on the following ratios (all other being equal)?

Total debt to equity        Times interest earned

Select one:

a. None                               Increase

b. None                               None

c. Increase                         None

d. Increase                          Increase

e. Decrease                         None

Answer 1

1. If dividends are increased, the retention profits falls and the equity reduces.

The formula of end of the equity= beginning equity+retained profits

Retained profits=Net income- dividends.

Debt to equity ratio=total liabilities/total equity.

Reduction in the equity results in the increase in the debt to equity ratio

2.Times interest earned= EBIT/Finance cost.

EBIT is operating profit and dividends will be paid from the net income.

Hence, there will be none impact on the times interest earned by increase in the dividends policy

Option c is correct