How do dividends impact the book value of a company?

Dividends are payments made to shareholders out of a company's profits. When dividends are declared and paid, they reduce the retained earnings portion of shareholders' equity on the balance sheet. Retained earnings are a significant component of the book value of a company, which is calculated as total assets minus total liabilities.

By distributing dividends, the company is effectively transferring some of its retained earnings to shareholders, hence reducing the total equity in the company. As a result, the overall book value of the company decreases with the payment of dividends. This is why the correct answer indicates that dividends decrease the book value of a company.

In contrast, other options imply different outcomes that do not reflect the impact of dividend payments on equity. Some may think of dividends as simply a redistributing of profits without considering their effect on retained earnings, which is the crux of understanding how dividends influence the book value.