What is the impact of share repurchases on EPS?

What is the impact of share repurchases on EPS?

• A. EPS increases because the share count is reduced; net income may be slightly lower due to lost interest on cash.
• B. EPS decreases because buybacks reduce earnings.
• C. EPS remains unchanged.
• D. EPS increases because the company borrows more.

Answer: (A)

The key idea is that EPS (earnings per share) is computed as net income divided by the number of shares outstanding. When a company buys back its own shares, the number of shares outstanding falls. If net income doesn’t drop proportionally, the ratio rises, so EPS increases. There’s a small caveat: using cash for the buyback means that cash could have earned interest, so net income might dip slightly due to the lost interest. If the buyback is financed with debt, the extra interest expense could further reduce net income and offset the EPS gain. Overall, the dominant effect is a higher EPS because there are fewer shares, with a potential small drag from the use of cash or the cost of debt.

The key idea is that EPS (earnings per share) is computed as net income divided by the number of shares outstanding. When a company buys back its own shares, the number of shares outstanding falls. If net income doesn’t drop proportionally, the ratio rises, so EPS increases. There’s a small caveat: using cash for the buyback means that cash could have earned interest, so net income might dip slightly due to the lost interest. If the buyback is financed with debt, the extra interest expense could further reduce net income and offset the EPS gain. Overall, the dominant effect is a higher EPS because there are fewer shares, with a potential small drag from the use of cash or the cost of debt.