ACCA Advanced Financial Management (AFM) Practice Exam

Which of the following best describes the outcome of stock repurchases for shareholders?

1. Increased cash dividends

2. Greater voting power

3. Potential for capital gains

4. Immediate liquidity

The correct answer is: Potential for capital gains

The outcome of stock repurchases for shareholders is best described by the potential for capital gains. When a company buys back its own shares, it reduces the number of shares outstanding in the market, which often leads to an increase in the earnings per share (EPS) and can improve the stock price over time. As a result, shareholders may experience capital gains, which are the increases in the market value of their investment as the stock price rises due to the reduced supply and enhanced financial metrics of the company. This mechanism of stock repurchases benefits shareholders by potentially increasing the value of their holdings, especially if the repurchase signals that the company is confident in its financial health and future performance. It’s an effective strategy for companies to return value to shareholders while also providing the opportunity for price appreciation. In contrast, increased cash dividends provide immediate returns rather than capital gains, greater voting power from reduced shares might occur but is not a primary financial motivation behind repurchases, and immediate liquidity typically involves selling shares rather than holding onto them for gains. Thus, the most significant impact of stock repurchases is indeed the potential for capital gains for shareholders.