When a firm declares a stock repurchase:
A)the number of outstanding shares falls along with the price
B)the number of outstanding shares falls and the price remains unchanged
C)an investor will receive cash in exchange for a smaller %age of ownership
D)demand drives the stock price up

Question

Quizplus · Accepted Answer

When a firm declares a stock repurchase, it buys back some of its outstanding shares, which reduces the number of outstanding shares. As a result, the company's earnings per share (EPS) increase because the same amount of earnings is spread over fewer shares. However, the price of the stock typically does not change because the value of the company (its assets, liabilities, and future earnings potential) remains the same, but it is now spread over fewer shares. Therefore, the price per share remains unchanged. Conversely, if the demand for the stock rises due to the announcement, the stock price may go up, but it would not be because of the stock buyback itself.

When a Firm Declares a Stock Repurchase