Financial Leverage question

CFA Level I
#1

I received this question, which transactions affect a company financial leverage ratio?

The answer-cash dividend by decreasing A and E

Can someone help me understand this?

FL = Assets/Equity

If you pay a cash dividend assest would decrease because cash decreased. Wouldn’t Equity also have to decrease to keep the accounting equation in tact?

Some insight would be greatly appreciated.

Thank you

#2

When you declare a (cash) dividend, equity (Retained Earnings) decreases and liabilities (Dividends Payable) increase. When you pay the dividend, assets (Cash) decrease and liabilities (Dividends Payable) decrease. The net effect is a decrease in assets and a decrease in equity.

#3

Thank you! It makes sense now!

#4

You’re quite welcome.