Limited Time Offer: Save 10% on all 2022 Premium Study Packages with promo code: BLOG10

Effects of Repurchases on Earnings per Share

Effects of Repurchases on Earnings per Share

Share repurchase may increase, decrease, or have no effect on EPS depending on how the repurchase is financed.

$$\text{EPS}=\frac{\text{Net income (NI)}}{\text{Shares outstanding}}$$

If the net income is constant, a smaller number of shares after the buyback leads to a higher EPS. If the buyback is financed with borrowed funds, both net income and outstanding shares will be decreased. This results in a lower EPS.

Internal Financing

The post-repurchase EPS will be higher than the pre-repurchase EPS if the rate of return on retained earnings is less than the cost of capital.

External Financing (Borrowed funds)

If repurchase is made with borrowed funds, the EPS will:

  • increase if the After-tax cost of debt < Earnings yield of the shares before the repurchase.
  • decrease if the After-tax cost of debt > Earnings yield of the shares before the repurchase.
  • remain unchanged if the After-tax cost of debt = Earnings yield of the shares before the repurchase.

Example 1: Share Repurchases using Idle Cash

Grino Ltd. has the following information:

  • Outstanding shares worth $12 million.
  • Net income of $150 million.
  • Grino’s share price is $40
  • Cash worth $200 million is invested in government treasury bills at a zero percent interest.
  • Grino’s analysts estimate that the shares could be bought in the open market at $50.

Calculate the impact on EPS if Grino buys back the shares at $50 using idle cash.


$$\text{Current EPS}=\frac{$150\ \text{million}}{$12\ \text{million}}=$12.5$$

After a share repurchase at $50, the number of shares outstanding reduces by 4 million \(\frac{$200,000,000}{$50}\), and the new shares outstanding is \(12,000,000-4,000,000=8\ \text{million}\).

EPS after repurchasing shares is \(\frac{$150,000,000}{8,000,000 \text{ shares}}=$18.75/ \text{share}\).

EPS has increased by 50% because Grino used idle cash to repurchase the shares.

Example 2: Share Repurchases using Borrowed Funds

Jefferson Systems will borrow $16 million to finance a share repurchase. The following information is given:

  • Earnings after-tax is $9 million.
  • EPS before share repurchase is $3.
  • Shares outstanding is 3 million.
  • Planned share repurchase is 300,000 shares.

Calculate the EPS after the share buyback and after-tax cost of borrowing as 6%.


$$\begin{align*}\text{EPS after repurchasing}&=\frac{(\text{Earnings}-\text{After-tax cost of funds})}{\text{Shares outstanding after buyback}}\\ \\ &=\frac{[$9,000,000-($16,000,000\times0.06)]}{2,700,000 \text{ shares}}\\&=$2.98/ \text{share}\end{align*}$$

We can see that with an after-tax cost of debt of 6%, the EPS decreased from $3 to $2.98.


A firm has 3 million outstanding shares and earnings of €6 million. It has €12 million in idle cash that it plans to use to repurchase shares in the open market. The firm’s current share price is €60. The firm is planning to use the entire €12 million to finance the purchase.

The firm’s EPS after the repurchase will be closest to:

  1. €2.00.
  2. €2.14.
  3. €3.00.


The correct answer is B.

The company can repurchase 200,000 shares \(\bigg(\frac{€12,000,000}{€60}\bigg)\). After the repurchase, the number of outstanding shares would be 2.8 million shares (3,000,000 – 200,000 shares).

$$\text{EPS after repurchasing the shares}=\frac{€6,000,000}{2,800,000 \text{ shares}}=€2.14/ \text{share}$$

A is incorrect. This is the earnings before the share buyback.

$$\text{EPS before repurchasing the shares}=\frac{€6,000,000}{3,000,000 \text{ shares}}=€2/ \text{share}$$

Reading 16: Analysis of Dividends and Share Repurchases 

LOS 16 (i) Calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed by the company’s surplus cash and 2) the company uses debt to finance the repurchase

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop GMAT® Exam Prep

    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    Crisp and short ppt of Frm chapters and great explanation with examples.