Question

In: Finance

Stock repurchases a. increase liabilities. b. decrease liabilities. c. decrease per share earnings. d. increase per...

Stock repurchases

a.

increase liabilities.
b.

decrease liabilities.
c.

decrease per share earnings.
d.

increase per share earnings.

Solutions

Expert Solution

Stock repurchases (i.e. buy back of shares) increases per share earnings. Therefore correct option is (D)

Explanation:

Earnings per share ( EPS) = Company's Earnings/ Shares outstanding of the company.

If shares are repurchased then shares outstanding (denominator) will reduce and EPS will gets larger because company's earnings stay the same (numerator)

Example: If the Earnings of the company are $ 100 and number of share outstanding is 50 then EPS = $100 / 50 = 2

Now if company repurchases (buyback) 10 shares out of 50 then EPS will be $100 / 40 = 2.5

Therefore Correct answer is option (D)

If the option D is correct then option C is definitely incorrect because earing per share increases not decreases after repurchase of shares.

Shares are classified as equity therefore this transaction has no impact on liabilities. Therefore option a and b is also incorrect.

jeff jeffy answered 2 years ago
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