Calculate dividend cover
Compare profit available for ordinary dividends with the annual ordinary dividend.
Section 3.5 · Analysis and communication of accounting information
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Use the ratio formulae in the syllabus appendix exactly; Cambridge states these are the only formulae accepted. Use year-end balances where appropriate unless the question specifies averages, and round to the requested number of decimal places. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the AS Topic 1.6 ratio, financial-statement and stakeholder skills. These lessons add only the A Level ratios and interpretation required by Topic 3.5.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Profit available is $120,000 and annual ordinary dividend is $40,000. What is cover?
What you will learn
- Calculate dividend cover from profit available and annual ordinary dividend
- Report cover in times
- Interpret payout sustainability with cash and investment needs
Use the stated profit and dividend
Dividend cover (times) = profit for the year available to pay ordinary dividend ÷ annual ordinary dividend. Annual ordinary dividend = interim dividend paid + final dividend proposed.
A result of 2 times means the stated profit available is twice the annual ordinary dividend. If the annual dividend is nil, the ratio cannot be divided by zero; explain that the calculation is not available from the formula.
Interpret cover as an earnings buffer
Lower cover means a larger share of the stated profit is distributed as ordinary dividend, leaving a smaller accounting-profit buffer. Higher cover can leave more profit retained, but does not by itself show cash availability or the board's future policy.
Assess cash flows, debt servicing, future investment, one-off profit and whether the final dividend is only proposed. Do not conclude a dividend is sustainable from cover alone.
Pause and explain
What does dividend cover of 1.5 times indicate?
Worked example
Profit available to pay ordinary dividend is $150,000. Interim dividend paid is $18,000 and final dividend proposed is $42,000. Calculate cover.
Show the worked solution
- Annual ordinary dividend = $18,000 + $42,000 = $60,000.
- $150,000 ÷ $60,000 = 2.5.
- Report dividend cover as 2.5 times.
Answer Dividend cover is 2.5 times.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Profit available to ordinary shareholders is $210,000. Annual ordinary dividend is $70,000. Calculate cover and the amount retained before other uses.
Give me a hint
Find cover by division and the simple difference separately.
Compare my reasoning
- $210,000 ÷ $70,000 = 3 times.
- $210,000 − $70,000 = $140,000 not distributed as this annual ordinary dividend.
- Do not treat the difference as cash; it is a profit comparison before other cash uses.
Dividend cover is 3 times. The simple profit difference is $140,000, which is not necessarily available cash.
Look for these in your work
- Calculate cover as 3 times.
- Calculate the $140,000 profit difference.
- Distinguish profit from cash.
Profit available rises from $160,000 to $180,000. Annual dividend rises from $80,000 to $120,000. Calculate cover in both periods and compare.
Give me a hint
Use the annual dividend total for each year.
Compare my reasoning
- Earlier cover = $160,000 ÷ $80,000 = 2 times.
- Current cover = $180,000 ÷ $120,000 = 1.5 times.
- Profit increased but cover declined because the dividend grew faster than profit available.
Cover falls from 2 to 1.5 times; the payout uses a larger proportion of profit.
Look for these in your work
- Calculate both periods.
- Identify the fall to 1.5 times.
- Explain the faster dividend growth.
A company proposes a special dividend that would reduce cover below one time. Advise an ordinary shareholder what further evidence and trade-offs matter.
Give me a hint
Cover below one means the stated annual dividend exceeds the stated profit available for it, but cash and policy context still matter.
Compare my reasoning
- Calculate the proposed annual ordinary dividend and compare it with profit available, noting the below-one cover.
- Check cash reserves, debt obligations, working capital and planned investment; profit is not the same as cash.
- Assess whether the payout is a one-off proposal, its approval status and the effect on future financial resilience.
A below-one cover warns that the proposed dividend exceeds current profit available. Check cash, debt, investment and whether the special payment is sustainable before supporting it.
Look for these in your work
- Identify cover below one as a warning, not a complete cash test.
- Review cash, debt and investment needs.
- Consider proposal status and future resilience.
Common mistakes
- Using market price in the formula
- Dividing dividend by profit and reporting that as cover
- Treating accounting profit as cash immediately available
What can you explain now?
What is the numerator in dividend cover?
Compare with the explanation
Profit for the year available to pay ordinary dividend
The appendix compares profit available for ordinary dividend with the annual ordinary dividend.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the dividend-cover formula and state why it does not prove cash affordability.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.