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.
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