How would the declaration of a cash dividend affect the calculation of a company's price-earnings ratio? (Hint: Do not consider any change in the market price of the stock that might occur because of the declaration of the dividend. )

Question

Quizplus · Accepted Answer

Price-Earnings Ratio = Market price per share ÷ Earnings per share
The declaration of a cash dividend increases liabilities (dividends payable)and decreases stockholders' equity (retained earnings).Because the liabilities and stockholders' equity are not components of this ratio,the declaration of the dividend,in itself,has no effect on it.

How Would the Declaration of a Cash Dividend Affect the Calculation