Question

Assume that a firm had shareholders' equity on the balance sheet at a book value of $1,600 at the beginning of the year. During the year, the firm earns net income of $1,300, pays dividends to shareholders of $600, and uses $300 to repurchase common shares. The book value of shareholders' equity at the end of the year is:

a. $400
b. $2,600
c. $2,000
d. $3,800

Answer 1

The book value of shareholders' equity at the end of the year is calculated by starting with the beginning equity and adjusting for net income, dividends paid, and shares repurchased. For this scenario, the ending equity is $2,000, which is option c.

Step-by-step explanation:

The question involves calculating the book value of shareholders' equity at the end of the year given a set of financial transactions. To find this value, we start with the beginning book value of equity and adjust for the company's earnings, dividend payments, and stock repurchases over the year. The formula for this calculation is:

Ending Shareholders' Equity = Beginning Equity + Net Income - Dividends - Repurchases of Shares

Substituting the given numbers:

Ending Shareholders' Equity = $1,600 + $1,300 - $600 - $300

Ending Shareholders' Equity = $2,000

The correct answer is c. $2,000.

The book value of shareholders' equity at the end of the year can be calculated by taking the beginning book value of $1,600 and adding the net income of $1,300. This gives us a total of $2,900. Then we subtract the dividends of $600 and the common share repurchase of $300. The book value of shareholders' equity at the end of the year would be $2,000.