Which of the following is NOT a possible result of a share buy-back?
A) Removing a large number of shares from circulation can change the ability of certain shareholders to control the company.
B) If the number of remaining shares is relatively small, the remaining shares will be less liquid.
C) The company will decrease its leverage ratio (debt-to-equity ratio).
D) By repurchasing shares when they are undervalued, managers can effectively transfer value from selling shareholders to shareholders who don't take part in the buy-back.

Question

Quizplus · Accepted Answer

The other choices are all possible results of a share buy-back. Removing shares from circulation can change the balance of control among shareholders, a smaller number of shares can result in less liquidity, and undervalued share buy-backs can transfer value from selling shareholders to those who don't participate. However, a share buy-back does not necessarily affect a company's leverage ratio, as it depends on how the buy-back is financed (e.g. using cash reserves, borrowing, or issuing new shares). In some cases, a buy-back could even increase a company's leverage ratio if it uses debt to finance the repurchase.

Which of the Following Is NOT a Possible Result of a Share