Question

Assume that a firm's book value at the beginning of the year is $17,800 and that the firm reports net income of $6,200. if the firm's book value at the end of the year is $20,000 what was the amount of dividends paid during the year?

a. $2,200
b. $8,800
c. $4,000
d. insufficient information to determine.

Answer 1

The correct option is c. The amount of dividends paid during the year can be calculated by finding the change in book value from the beginning to the end of the year. In this case, the amount of dividends paid is $4,000.

Step-by-step explanation:

The amount of dividends paid during the year can be calculated by finding the change in book value from the beginning to the end of the year. In this case, the book value increased by $2,200 ($20,000 - $17,800).

Since net income is part of retained earnings and dividends are paid out of retained earnings, we can assume that the increase in book value is due to net income minus dividends. Therefore, the amount of dividends paid during the year is $6,200 - $2,200 = $4,000.