Work out and contrast how a share buyback affects EPS when it is funded 1) from surplus cash and 2) with borrowed money
The idea
A buyback raises EPS only if the earnings given up for each share retired are smaller than the current EPS. Compute new EPS as (net income − after-tax cost of funds) ÷ (shares outstanding − shares repurchased). With surplus cash, the cost is the after-tax interest income forgone; with borrowing, it is after-tax interest on the new debt. A quick rule: EPS rises when the earnings yield (EPS ÷ price) exceeds the after-tax cost of funds, is unchanged when they are equal, and falls when it is lower. The traps are ignoring the lost interest, using the pre-tax rate, and assuming a higher EPS means higher value.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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