Stock repurchases can affect earnings per share by

Stock repurchases can affect earnings per share by

• A. Increasing EPS by reducing shares outstanding
• B. Decreasing EPS by increasing shares outstanding
• C. Having no effect on EPS
• D. Immediately doubling EPS

Answer: (A)

When a company buys back its own stock, the number of shares outstanding falls. Earnings per share (EPS) is net income divided by shares outstanding, so if net income stays the same and there are fewer shares, EPS goes up. That is the main mechanical effect of a stock repurchase. Keep in mind that if the buyback is financed with debt, interest expense can reduce net income, which might offset or even negate the EPS gain. But the straightforward, primary effect of a buyback is to increase EPS by reducing the share count.

When a company buys back its own stock, the number of shares outstanding falls. Earnings per share (EPS) is net income divided by shares outstanding, so if net income stays the same and there are fewer shares, EPS goes up. That is the main mechanical effect of a stock repurchase.

Keep in mind that if the buyback is financed with debt, interest expense can reduce net income, which might offset or even negate the EPS gain. But the straightforward, primary effect of a buyback is to increase EPS by reducing the share count.