- CFA Exams
- CFA Level I Exam
- Topic 4. Corporate Issuers
- Learning Module 18. Analysis of Dividends and Share Repurchases
- Subject 5. Payout policies
CFA Practice Question
A share repurchase may ______ EPS.
II. decrease
III. have no effect on
I. increase
II. decrease
III. have no effect on
A. I only
B. II only
C. I, II and III
Explanation: The effect depends on whether the repurchase is financed internally or externally.
User Contributed Comments 8
| User | Comment |
|---|---|
| twintigers | don't be confused with this one. although it is obviously after second thought. |
| poomie83 | there are two factors involved here; earnings and # of shares - if either/both moves up or down that will affect EPS |
| ksnider | could someone explain what would happen if it was internally financed vs externally financed?? |
| harpalani | @ksnider: If buy back is internally financed, it is likely to reduce no. of outstanding shares, and increase earnings. If it is externally financed (through debt) then increase in earnings could be offset by interest costs in which case earnings may not increase. |
| devaughnb | Its hard to believe that interest from debt raised for purposes of repurchase, would outweigh shares repurchased given the immediacy of the repurchase. |
| MathW | It seems preposterous to imagine that the firm might take on debt just in order to buy back a few of its shares; I understood that buybacks occurred when the firm had excess funds, as an alternative to a dividend. Assuming the cost of financing is internal, then the correct answer would be A. |
| rkennan1 | @MathW it may seem preposterous however it is actually extremely common, especially in this current environment. |
| bball123h | Perhaps change that "and" to an "or". Otherwise that's one hell of a roller coaster. |