A company decides to repurchase 5 million of its outstanding 20 million shares with debt funding. After the repurchase, the company's after-tax earnings decline by 20%. The new earnings per share (EPS) is most likely:
The pre-repurchase EPS is EAT / 20 million. The EPS after the repurchase is (EAT × (1- 20%) / 15 million). To connect the two values algebraically:
(EAT / 20 million) × X = (EAT × (1- 20%) / 15 million)
X = (1 - 20%) × (20 million / 15 million) = 1.067
Because X is greater than one, the EPS has increased after the repurchase.