Series 7 Exam Question 113: Answer and Explanation

Question: 113

TUV Corporation has announced a $0.50 dividend to holders of record of their common stock. At the time of the announcement and prior to the dividend being paid, what happens to TUV's working capital?

• A. It decreases
• B. It remains the same
• C. It increases
• D. It’s impossible to tell with the information given

Correct Answer: A

Explanation:

A. The formula for working capital is as follows:

working capital = current assets - current liabilities

Working capital is the amount of money that a corporation has to work with. Current assets are assets a company has that are easily convertible into cash within a one-year period. Current liabilities are what a company owes within a one year period. So if a company declares a cash dividend, it becomes a current liability. If the current liablities increase and the current assets remain the same, the working capital decreases.

woking capital↓ = current assets - current liabilities↑