A company has initiated the process of selling unproductive land, representing 5% of its total assets, and using the proceeds to buy back its common shares. Holding other factors constant, these actions by the company will most likely result in a:
The answer is B. Can someone explain this to me in more detail? Thank you~!
All things held constant, net income will remain the same, buying back shares with the proceed from selling the land will reduce outstanding shares. Same income and less shares==> same number divided by a smaller number==> bigger ROE.
Thank you, this was a great way to explain it.
that is not how roe is calculated. roe is calcualted as net income / shareholder equity.
when you buyback shares, you typically reduce assets via cash and shareholders equity via treasury shares.
presumably the unproductive land has no effect on net income. so selling it has no impact. but once you use cash to purchase shares then equity will fall.
the fall in equity combined with stable ni will cause a rise in roe.
another impact is higher eps due to lower share count which is what the other guy tried to describe.