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which of the following statements is correct. (Kaplan kit)
i am reproducing only 2 out of the 4
B. a share repurchase scheme can increase both the EPS and gearing
C. M&M argued that the financing decision is more important than the dividend decision.
the correct answer is B and i had chosen C
if shares r repurchased, this means the number of shares of the co will increase, meaning equity will go up. so that will surely reduce EPS and decrease gearing.
so y is B correct?
also, can u pls explain y C is not correct? because since dividends r irrelevant, that just leaves us with the finance decision of selecting projects with npv>0
thanks
I the company buys back shares, there will be fewer shares in issue which will increase EPS and reduce gearing.
I don’t like C, however M&M argued that there isn’t really anything to decide with regard to the financing. If there is not tax then it is irrelevant. If there is tax then more debt the better (but not anything that needs them to think about).
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