Final answer:
The modest decline in the total debt to book value of equity ratio from 1995 to 2013 is because retained earnings will be positive when net income exceeds dividends, contributing to an increased book value of equity.
Step-by-step explanation:
The modest decline in the ratio of total debt to the book value of equity for US nonfarm, nonfinancial firms from 1995 to 2013 can be explained by examining the relationship between net income and retained earnings. As long as net income exceeds dividends, retained earnings will be positive. Retained earnings are an important component of a company’s equity, and when they increase, they raise the book value of equity.
When a company's net income is greater than the dividends it distributes to its shareholders, the remainder is retained within the company as retained earnings. This increase in retained earnings contributes to the growth in the company’s equity, leading to an increased book value. Consequently, even if total debt remains constant or increases slightly, the ratio of debt to equity can still show a modest decline if equity is growing at a faster rate due to accumulating retained earnings.
Answer: d) Dividends