When a company uses excess cash to buy back some of its outstanding common stock,which of the following ratios will be affected directly in the manner described below?
A)Return on equity (ROE)will decrease.
B)Earnings per share (EPS)will increase.
C)The Price Earnings (PE)ratio will increase.
D)There will not be any effect on the three ratios.

Question

Quizplus · Accepted Answer

EPS = (Net income − Preferred dividends)÷ Average number of common shares outstanding.So,a decrease in the outstanding shares will increase EPS.P/E ratio = Current stock price (per share)÷ Earnings per share (annual).So,since EPS increases,the PE ratio will decrease.Return on equity (ROE)= (Net income − Preferred dividends)÷ Average common stockholders' equity.So,a decrease in the outstanding shares will increase ROE.

When a Company Uses Excess Cash to Buy Back Some