Question

If you ignore information effects, taxes and costs, a stock repurchase will: I. reduce the total assets of a firm. II. decrease the earnings per share. III. reduce the PE ratio more so than an equivalent stock dividend. IV. reduce the total equity of a firm. A. I and III only B. I and IV only C. II and IV only D. I, III, and IV only E. II, III, and IV only

Answer 1

Journal entry for stock repurchase:

Debit.Treasury Stock

Credit Cash

This will reduce Common Stock

This will also reduce Cash

I.Reduction of cash will reduce Total Asset of the firm

II.Number of shares outstanding will reduce. Hence Earning per share will increase instead of decreasing

III If the stock price remains same , due to increase in Earning per share , PE ratio will decrease.

IV Reduction of Common Stock will reduce total equity of the firm. Total asset and total equity will reduce to the same extent, there will be no effect on total liabilities.

Hence :

The following are true:

I,III, IV

D> I,III and IV only