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IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information

Which of the following best describes dividend cover?

Dividend cover is profit after tax and preference dividends divided by ordinary dividends. It shows how many times earnings available to ordinary shareholders could pay the dividend, indicating how safe the payout is and how much profit is retained.

  1. ADividends per share divided by market price per share
  2. BProfit after tax and preference dividends divided by ordinary dividendsCorrect
  3. COrdinary dividends divided by total assets
  4. DMarket price per share divided by earnings per share
  5. Ordinary dividends divided by profit before interest and tax

Explanation

Dividend cover measures how many times the ordinary dividend is covered by earnings available to ordinary shareholders, that is profit after tax and preference dividends divided by ordinary dividends. Option 0 describes dividend yield and option 3 describes the price-earnings ratio.

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