Using a Fair Value Balance Sheet, a Company's Financial Position

question 11

Multiple Choice

Using a Fair Value Balance Sheet, a company's financial position is as follows: cash of $30,000, total assets, net of cash, of $330,000, total debt of $200,000 and $160,000 worth of owners' equity, comprised of 100,000 common shares and $60,000 of retained earnings. If the company pays out its total cash in dividends, what happens to a shareholder's financial position?

• A) It diminishes as the share value drops from $1.60 to $1.30.
• B) It increases as share price is unchanged as dividends reduce retained earnings, and dividend payout equal $0.30 a share.
• C) It diminishes as dividends at $0.30 a share do not offset decreases in share value by $0.60 a share.
• D) It is unchanged as the $0.30 reduction in share value will be offset by the $0.30 in dividends.
• E) It diminishes as leverage will cause a reduction in equity to be more than offset by a loss in income.

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Definitions:

Accounting Identity

An equation that must always be true due to the way variables are defined, commonly used in economics and accounting to reflect the balance between different components.

Tax Rate

The percentage at which an individual or corporation is taxed by the government.

Municipal Bonds

Securities issued by municipalities to finance public projects, often tax-exempt for investors.

Interest Rates

The percentage of principal charged by the lender for the use of its money, influencing economic activity by encouraging or discouraging borrowing and spending.