Impact of Stock Repurchase on Financial Ratios

Hard Dividends And Repurchases Impact On Financial Ratios

XYZ Corporation has been consistently paying dividends to its shareholders for the past decade, and recently announced a stock repurchase plan intended to enhance shareholder value. Following the execution of the stock repurchase plan, analysts are concerned about the potential impact on XYZ's financial ratios, particularly the price-to-earnings (P/E) ratio and return on equity (ROE).

Given that the company uses its excess cash to repurchase shares rather than reinvest in growth opportunities or increase dividends, which of the following statements regarding the impact on XYZ's financial ratios after the stock repurchase is most accurate?

The stock repurchase will likely decrease the P/E ratio and increase ROI due to lower outstanding shares.

The stock repurchase will decrease the P/E ratio and decrease ROE as net income will remain unchanged.

The stock repurchase will likely increase the P/E ratio while decreasing ROE due to a higher number of outstanding shares.

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