Explanation:
To determine dividend cut risk after a 20% earnings decline, we need to calculate the new dividend coverage ratios:
Current Coverage Ratios:
After 20% Earnings Decline:
Analysis:
While debt ratios provide additional context (Company A has the highest debt at 37%), the immediate dividend coverage calculation clearly shows Company C is most at risk.
Correct Answer: C - Company C's coverage ratio falls below 1.0x after the earnings decline.
Ultimate access to all questions.
An analyst gathers the following information of three companies in the same industry:
| Company A | Company B | Company C |
|---|---|---|
| Dividend coverage ratio (x): | 3.13 | 2.50 |
| Debt ratio: | 37% | 22% |
If the earnings of all three companies are expected to decline by 20% due to a business downturn, which company has the highest risk of a dividend cut?
A
Company A
B
Company B
C
Company C
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