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Practice Questions – Chapter 19, Question 5

This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.

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June 4, 2016 at 9:31 am #319265
nzeadall
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Dear Sir, I have a question regarding “Practice Questions – Chapter 19, Question 5”
The answer is a share repurchase will increase both earnings per share and gearing.
Repurchasing shares would increase equity and hence decrease gearing, right? and how will it increase EPS?
My answer was M&M (without Tax) , finance decision is more important than Div decision.
Thank u for clarifying
June 4, 2016 at 10:23 am #319284
John Moffat
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A share repurchase will reduce the number of shares – not increase it. (It is buying back shares from the shareholders and cancelling them).
With fewer shares in issue, the EPS will be higher; also the equity will be lower and so the gearing will be higher.
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