ACCA Advanced Financial Management (AFM) Practice Exam

What type of cash can stock repurchases dispose of?

1. Long-term finance cash

2. Operating cash flows

3. One-time cash from an asset sale

4. Short-term loan proceeds

The correct answer is: One-time cash from an asset sale

Stock repurchases primarily utilize cash that is generated from specific activities, such as one-time cash from asset sales. This is because companies often choose to use surplus cash that is available after strategic asset liquidations or financial restructuring activities to repurchase their own shares. This form of financing reflects a judicious use of cash that may be otherwise non-operating in nature, helping to return value to shareholders by reducing the overall number of shares outstanding, thereby increasing earnings per share and potentially boosting stock prices. In contrast, cash derived from long-term financing, operating cash flows, or short-term loan proceeds are generally earmarked for ongoing operational needs or capital expenditures rather than for stock repurchasing. Long-term finance cash would typically focus on supporting long-term investments, while operating cash flows are tied to the day-to-day function of the business and may be allocated for reinvestment or operational expenses. Short-term loan proceeds, similarly, are intended to cover immediate financial needs and would not typically be strategically utilized for stock buybacks. Therefore, the most appropriate source of cash for stock repurchases is indeed the one-time cash from an asset sale, as it effectively reflects cash that is not central to the ongoing operations of the company and provides a suitable mechanism for capital allocation