A firm pays out half its earnings as dividends. If its net income is $50, then
I. Its assets increase by $25 -
II. Its equity increases by $25 -
III. Its equity increases by $50
IV. The book value of the firm increases by $50
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A. B. C. D.Explanation
Since half of $50 is paid out as dividends and the other half retained, the book value and equity increase by $25 and so do assets. Remember the basic equation,
Assets = Liabilities + Equity.