Chartered Financial Analyst Level 2

Explanation

Stock dividends (Option B) do not affect a company's leverage ratios because they involve issuing additional shares to existing shareholders without any cash outflow from the company.

Why stock dividends don't affect leverage ratios:

• No cash outflow: The company doesn't pay out cash, so assets remain unchanged
• No change in debt levels: Total liabilities stay the same
• Only equity restructuring: The equity section is restructured by transferring amounts from retained earnings to contributed capital, but total equity remains unchanged

Why other options affect leverage ratios:

• Regular cash dividends (Option C): Reduce cash (assets) and retained earnings (equity), increasing leverage ratios
• Extra dividends (Option A): Also reduce cash and retained earnings, increasing leverage ratios

Leverage ratios (like debt-to-equity, debt-to-assets) are affected when there are changes to the numerator (debt) or denominator (equity or assets). Stock dividends only rearrange equity components without changing total equity or assets.