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 Net income (NI)/20 million. The EPS after the repurchase is [NI x (1 - 20%)/15 million]. To connect the two values algebraically:
(NIl20 million) × X= [NI × (1 - 20%)/15 million]
X= (1 -20%) × (20 million/15 million) = 1.067
Because X is greater than 1, the EPS has increased after the repurchase.