Question

what is a consequence of a repurchase program

a)ROA will increase, but will equal there will be no rise in stock price

b)roa will increase, and the stock value will rise

c)repurchase does nothing to improve the actual firm performance, no impact is made on ROA/ROE

d)None of above

Answer 1

The correct answer is option B i.e. ROA will increase, and the stock value will rise

Assuming that the price-earnings (P/E) multiple at which the stock trades is unchanged, the repurchase should eventually result in a higher share price.

On the balance sheet, a share repurchase will reduce the company’s cash holdings, and consequently its total assets base, by the amount of the cash expended in the repuchase, The repurcahse also simultaneously reduce shareholders' equity on the liabilities side by the same amount. Because of whih, performance metrics such as return on assets (ROA) and return on equity (ROE) typically improve subsequent to a share repurcahse.

Therefore, option B i.e. ROA will increase, and the stock value will rise is correct.

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