How does share repurchase affect a financial model's equity capitalization and per-share metrics?

• A. It increases cash and shares outstanding, lowering EPS.
• B. It reduces cash and shares outstanding, generally increasing EPS and ROE if profitability remains stable.
• C. It has no effect on EPS or ROE.
• D. It reduces cash but increases shares outstanding.

Answer: (B)

When a company buys back its own stock, it uses cash and reduces the number of shares outstanding. This directly lowers shareholders’ equity through the treasury stock component and, on a per-share basis, boosts metrics like EPS because net income is spread over fewer shares. If profitability remains stable, return on equity tends to improve since the equity base is smaller while net income is unchanged. So the mechanism is: cash decreases, shares outstanding decrease, and per-share metrics like EPS and ROE generally rise. The other descriptions don’t fit the mechanics of a buyback: cash isn’t increased, shares outstanding aren’t increased, and EPS/ROE do change when the share count and equity base are altered.