Impact of Dividends on Financial Ratios

Very Easy Dividends And Repurchases Impact On Financial Ratios

Company XYZ has just announced a dividend payment of $1 per share, and investors are curious about how this decision will impact key financial ratios. One of the most significant concerns is the effect on the company's earnings per share (EPS) and its price-to-earnings (P/E) ratio. As a finance professional reviewing this announcement, it is important to understand the implications of dividends on these financial metrics.

Which of the following statements accurately describes the impact of paying dividends on a company's financial ratios?

Paying dividends decreases the earnings per share (EPS) because dividends reduce retained earnings.

Paying dividends does not affect the earnings per share (EPS) but may impact the price-to-earnings (P/E) ratio.

Paying dividends increases the price-to-earnings (P/E) ratio by increasing available cash for reinvestment.

Hint

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