How would paying out a $2 million cash dividend affect cash and net working capital?
It seems to me that paying out a $2 million cash dividend will diminish the cash and net working capital by $2 million plus the costs of paying this dividend.
You are correct in assuming that paying out a $2 million cash dividend will reduce both cash and net working capital. Here's a breakdown of how this affects these two aspects:
1. Cash: When a company pays out a cash dividend, cash is transferred from the company's bank account to its shareholders. This means that the company's cash balance will decrease by $2 million. However, it's important to note that there may be additional costs associated with paying the dividend, such as transaction fees or taxes, which would further reduce the cash balance.
2. Net working capital: Net working capital is calculated by subtracting a company's current liabilities from its current assets. Current assets typically include cash, accounts receivable, and inventory, among other assets, while current liabilities include short-term debts and obligations. When a cash dividend is paid, the cash balance, which is a part of current assets, decreases. As a result, the net working capital is reduced by $2 million.
It's worth mentioning that paying cash dividends does not directly impact the company's profitability or equity, as dividends are usually paid out of accumulated earnings or retained earnings. However, reducing cash and net working capital may have implications for the company's liquidity and ability to meet its short-term obligations.