How would paying out a $2 million cash dividend affect cash and net working capital?
To determine how paying out a $2 million cash dividend would affect cash and net working capital, we need to consider a few factors:
1. Cash Impact: Payment of a cash dividend reduces the overall cash balance of a company. In this case, if a $2 million cash dividend is paid out, it means that $2 million will be deducted from the company's cash holdings.
2. Net Working Capital Impact: Net working capital is a measure of a company's operating liquidity. It is calculated by subtracting current liabilities from current assets. Paying out a cash dividend does not directly impact net working capital because both cash and current liabilities (such as accounts payable and accrued expenses) are adjusted in the calculation. However, if paying the dividend reduces the cash balance significantly, it could impact the company's ability to meet its short-term obligations and affect net working capital indirectly.
Overall, paying out a $2 million cash dividend would decrease the company's cash balance by $2 million, while the impact on net working capital would depend on the company's ability to maintain sufficient cash reserves to meet its current liabilities.