ACCA Financial Management (F9) Certification Practice Exam

What is the purpose of a share repurchase?

1. To increase shareholder equity

2. To improve share liquidity

3. To buy back shares using surplus cash

4. To pay off company debts

The correct answer is: To buy back shares using surplus cash

The purpose of a share repurchase primarily revolves around the company buying back its own shares using surplus cash. This action typically serves several strategic objectives. By repurchasing shares, a company can reduce the number of shares outstanding in the market, which can lead to an increase in earnings per share (EPS) since the same amount of net income is distributed over fewer shares. This can make the stock more attractive to investors and potentially raise its market price. Additionally, share repurchases can signal to the market that the company believes its shares are undervalued, potentially restoring investor confidence. Moreover, using surplus cash for share buybacks rather than holding it on the balance sheet can enhance returns for existing shareholders by returning excess capital rather than letting it sit idle. In contrast, increasing shareholder equity typically does not directly occur through share repurchases, as the buyback reduces the number of equity shares. Improving share liquidity is not the primary intention of repurchases; instead, it may actually have the opposite effect by reducing shares available in the market. Lastly, paying off company debts is a different strategic approach, focusing on reducing liabilities rather than managing equity distribution. Thus, utilizing surplus cash specifically for share buybacks encapsulates the core purpose of a share repurchase.