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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?

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Zviko

Answer:

Equity of the firm decreases by $32,500.

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.

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