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Hello sir,
Could you please help me understand why is this statement true:
A share repurchase scheme can increase both earnings per share and gearing.for example, A company share 100000shares and price is $30p/s. due to probably bad management, the share price falls to $20p/s…the investor are selling their shares. the investors may want to sell 50000 shares at $20p/s.. the company may be decide to buy back the shares..
With good management, the company invests in projects with positive npv, the share price will rise to maybe $40p/s…new investors can now buy the 50000 shares the company bought back for $40p/s( $2m)…they bought it for 50000 at $15p/s ($750000)..the company now makes a profit of $1250000…sorry for the mistake….50000 @ $20p/s should be $1m…..so. $2m-$1m= $1m…. A profit of $1million
Akinwumi: Please don’t answer in this forum. It is the Ask the Tutor forum and you are not the tutor. (And what you have written is not the correct answer!)
Annian: If the company buys back shares, then there are fewer shares in issue. Buying back the shares does not change the total earnings, and so the earnings per share will be higher.
Also, if they buy back shares, the share capital will be lower but the long term debt borrowing will stay the same – therefore the gearing ratio will be higher.
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