Question

Stock buybacks will have positive effects on all except which of the following?

Select one:

a. Return on Assets

b. Earnings per Share

c. Cash Flow from Operations

d. Free cash flow per share

Answer 1

Option (c) is the answer.

Stock buybacks have positive effects on all the given choices except Cash flow from operations.

In stock buybacks, a company purchases its own shares and retires or cancel them.Stock buybacks have nothing to do with the operations part. They do not affect the net income. With buybacks, number of shares outstanding decreases. Buybacks reduce cash balance because stocks are being bought back by spending cash. When cash decreases, it will decrease assets.

Now, return on assets = Net income / Total assets

When net income gets unaffected, and number of outstanding shares decrease, so it will increase return on assets.

Also, when number of outstanding shares decrease, so, earnings per share and free cash flow per share will increase as there are lesser number of shares now.