Question

See Table 2.5 E showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases 1.6 million shares each year from 2016 to 2019. What would be its earnings per share in 2019? (Assume Mydeco pays for the shares using its available cash and that Mydeco earns no interest on its cash balances.) (Select the best choice below.) O A. A repurchase does not impact earnings directly, so any change to EPS will come from a reduction in shares outstanding. 2019 shares outstanding = 56.5 million - 4 x 1.6 million = 50.1 million, EPS = $24.3 million / 50.1 million = $0.49. OB. A repurchase does not impact earnings directly, so any change to EPS will come from an increase in shares outstanding. 2019 shares outstanding = 56.5 million + 4x1.6 million = 54.9 million, EPS = $24.3 million / 54.9 million = $0.44. OC. A repurchase does not impact earnings directly, so any change to EPS will come from a reduction in shares outstanding. 2019 shares outstanding = 56.5 million - 4x 1.6 million = 50.1 million, EPS = $14.8 million/50.1 million = $0.30. OD. A repurchase does not impact earnings directly, so any change to EPS will come from an increase in shares outstanding. 2019 shares outstanding = 56.5 million + 4x1.6 million = 54.9 million, EPS = $14.8 million / 54.9 million = $0.27.

Answer 1

A share repurchase is a transaction whereby a company buys back its own shares from the marketplace. A share buyback reduces the number of outstanding shares, which increases both the demand for the shares and the price.

Also, the EPS increases as the denominator (i.e., shares outstanding) decrease in number, thus result in increased return to the investors.

Answer: OPTION (B)

Shares outstanding = 56.5 Mn. - (4 x 1.6 Mn.) = 50.1 Mn.

Net income/earnings = 24.3 Mn.

Hence, EPS = 24.3 / 50.1 = 0.485 or 0.49.