Question

The compay has announced it is going to repurchase $32,500 worth of stock instead of paying a dividend of $1.30. a. What effect will this transaction have on the equity of the firm?

Answer 1

Equity of the firm decreases by $32,500.

Step-by-step explanation:

When a dividend is distributed, the following journal entry is created :

Dividend (debit)

Cash (credit)

Effect : This reduces the Owners Equity

When the firm repurchase $32,500 worth of stock the following journal is created :

Stock $32,500 (debit)

Cash $32,500 (credit)

Effect : Again the Equity of the firm decreases.