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share repurchase scheme

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › share repurchase scheme

  • This topic has 5 replies, 3 voices, and was last updated 6 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • September 5, 2016 at 10:36 am #337853
    annian
    Member
    • Topics: 27
    • Replies: 31
    • ☆☆

    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.

    September 5, 2016 at 1:25 pm #337890
    melonny05
    Member
    • Topics: 27
    • Replies: 55
    • ☆☆

    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…

    September 5, 2016 at 1:27 pm #337891
    melonny05
    Member
    • Topics: 27
    • Replies: 55
    • ☆☆

    sorry for the mistake….50000 @ $20p/s should be $1m…..so. $2m-$1m= $1m…. A profit of $1million

    September 5, 2016 at 3:44 pm #337927
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    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.

    September 5, 2016 at 4:17 pm #337940
    annian
    Member
    • Topics: 27
    • Replies: 31
    • ☆☆

    thank you very much

    September 5, 2016 at 5:37 pm #338021
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    You are welcome 🙂

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