Negative book equity value can arise when which of the following occurs?

Negative book equity value can arise when which of the following occurs?

• A. Large cash dividends to owners
• B. Long-run net losses
• C. Both Large cash dividends to owners and long-run net losses
• D. None of the above

Answer: (C)

Negative book equity happens when the company’s liabilities exceed its assets, so shareholders’ equity becomes negative on the balance sheet. This occurs when accumulated losses erode retained earnings, and it can also happen when large cash dividends are paid out, since dividends reduce both assets (cash) and equity (through retained earnings or contributed capital). If dividends are sizable relative to profits, retained earnings can drop below zero; similarly, ongoing net losses reduce retained earnings over time. When either factor occurs, or both together, the company can end up with negative book equity.

Negative book equity happens when the company’s liabilities exceed its assets, so shareholders’ equity becomes negative on the balance sheet. This occurs when accumulated losses erode retained earnings, and it can also happen when large cash dividends are paid out, since dividends reduce both assets (cash) and equity (through retained earnings or contributed capital). If dividends are sizable relative to profits, retained earnings can drop below zero; similarly, ongoing net losses reduce retained earnings over time. When either factor occurs, or both together, the company can end up with negative book equity.