Question

gnoring taxes, transaction costs, and other imperfections. If a firm repurchases shares instead of paying cash dividends, the primary diffrence will be an increase in the ________________.
A) total earnings of the firm
B) total value received by each investor
C) earnings per share
D) number of shares outstanding

Answer 1

Solution.>

If a firm repurchases shares instead of paying cash dividends, the primary diffrence will be an increase in the Earnings per share.

Option A is not a correct answer because in either of the case, the earnings of the firm remains the same.

Option B is not a correct answer because total value received by each investor decreases because they are not given cash dividends.

Option C is a correct answer because EPS = Earnings / No of shares outstanding, In the case of buyback the Earnings remains the same but no of outstanding shares decreases, hence EPS will increase.

Option D is not a correct answer because in the case of buyback no of outstanding shares decreases as company is buying back the shares exisiting in the market.

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