ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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How is Dividend Cover calculated?

Earnings per Share / Dividend per Share
Dividend per Share / Earnings per Share
Net Income / Total Dividends Paid
Gross Profit / Operating Expenses

The correct answer is: Earnings per Share / Dividend per Share

Dividend Cover is calculated by examining the relationship between a company’s earnings and the dividends it pays to shareholders. The correct method of calculation is Earnings per Share divided by Dividend per Share. This formula provides insight into how many times the earnings can cover the dividends, indicating the sustainability of a company’s dividend payments. A higher Dividend Cover suggests that the company is generating sufficient profit to comfortably pay dividends, which can be interpreted as a sign of financial health. The other options do not represent the correct way to assess the relationship between earnings and dividends. The option detailing Dividend per Share divided by Earnings per Share, for instance, would produce a ratio less than one, indicating that dividends are not being covered by earnings, which is not a conventional measure. Similarly, using Net Income over Total Dividends Paid does not yield the same relevant insight about earnings per share and is more focused on overall dividends rather than the efficiency of dividend payment relative to earnings. The last option, Gross Profit over Operating Expenses, serves a completely different context in financial analysis, measuring operational efficiency rather than the relationship between earnings and dividends.