Share buy-backs can be a good value-add strategy itf Select one: O a. The compan

Question

Share buy-backs can be a good value-add strategy itf Select one: O a. The company doesn't have suitable projects in which to invest O b. Investors are content with current returns O c. The company is fooking to increase the dividend ratio O d. It can artificially increase the earnings per share Assuming a tax rate of 21%, how will annual depreciation of $400,000 effect a project relevant cash flows? Select one O a. Decrease cash flows by $400,000 O b. Increase cash flows by $400,000 c. Reduce cash flows by $84,000 O d. Increase cash flows by $84,000 O e. Have no effect since depreciation is not a cash expense Although debt is usually the cheapest component of capital, it cannot be used to excess because 8:59 PM 6/13/2018

Explanation / Answer

Answer:

1)

Share buy back is a repurchase program by which a company buy back its own shares from the market because of many reasons to reduce its outstanding shares liability.

So, share buyback can be a good value add strategy if,

It can artificially increase the earning per share.

2)

Annual depreciation is a non cash expense which provide saving in cash outflows in the form of taxes.

So if the tax rate is 21% and depreciation is $400000.

There will be increase in cash flows by 21% x $400000 = $84000.

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