Repurchase
A company buying back its own outstanding shares, reducing share count and returning cash to remaining shareholders.
The exam’s favorite item gives you cash, shares outstanding, and a per-share repurchase price, then asks the effect on EPS or book value per share (BVPS). The decisive EPS rule compares the after-tax cost of the funds — the after-tax cost of debt if borrowed, or the after-tax interest the idle cash was earning — against the stock’s earnings yield (E/P), the inverse of its P/E: cost of funds below the earnings yield raises EPS; above it dilutes. For BVPS the trap reverses on a different benchmark — repurchasing above book value per share lowers BVPS, buying below book raises it.
Watch the wealth question: a buyback and an equal-sized cash dividend leave a shareholder equally well off, ignoring taxes and signaling. The classic confusion is with dividend — it forces taxable cash on every holder now, whereas a repurchase lets sellers choose and defers capital gains, yet neither changes enterprise value or pre-tax equity wealth. Don’t assume buybacks always lift EPS; that holds only when funds cost less than the earnings yield.
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