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CFA Level II Exam · Analysis of Dividends and Share Repurchases

Share Repurchase Methods and Their Effects

Updated 7 October 2026 · Fact-checked

A share repurchase (buyback) is a company using cash to buy back its own shares. Methods are open market, fixed-price tender offer, Dutch auction and direct negotiation. To solve questions, compute shares bought, new share count, then new EPS and book value per share, and compare buyback price with book value and intrinsic value.

Understand Share Repurchase Methods and Effects

A company with surplus cash can pay a dividend or buy back its own shares. In both cases cash leaves the firm. With a dividend, every shareholder receives cash and share count stays the same. With a buyback, only selling shareholders receive cash, and the share count falls.

There are four main methods. Open market repurchase: the firm buys shares in the market over time, with flexibility and no commitment to buy the full amount. Fixed-price tender offer: the firm offers to buy a stated number of shares at a set price, usually at a premium to market, within a stated period. Dutch auction: the firm states a range of prices, shareholders say how many shares they will sell at each price, and the firm sets the lowest price that lets it buy the target number. Direct negotiation: the firm buys a block from a large holder, sometimes at a premium (a greenmail-style purchase).

Effect on EPS: net income usually falls little, because the firm gives up only the after-tax interest it could earn on cash, or pays financing cost if it borrows. The share count falls. So EPS rises if the after-tax cost of funds (earnings yield given up) is lower than the earnings yield on the shares bought, which is 1 ÷ (P/E). In plain terms, EPS rises when the buyback earnings yield exceeds the after-tax cost of the funds used.

Effect on book value per share (BVPS): equity falls by the cash spent, and shares fall. If the buyback price is above the current BVPS, BVPS falls. If it is below BVPS, BVPS rises. Most buybacks are above book value, so BVPS usually falls.

On shareholder wealth: with perfect markets and no taxes, a buyback at fair value leaves wealth unchanged, the same as a dividend. If the shares are bought below intrinsic value, remaining holders gain and sellers lose. If bought above intrinsic value, remaining holders lose. Taxes, signalling and flexibility create practical differences. Buybacks are more flexible, since there is no expectation of repeating them. Also, a leveraged buyback raises financial leverage, and a buyback can be a way to offset dilution from share-based pay.

Key formulas to remember

Shares repurchased
Shares bought = Cash spent ÷ Repurchase price
Use the buyback price, not the pre-announcement price, if they differ.
EPS after buyback
New EPS = (Net income − after-tax cost of funds) ÷ (Old shares − Shares bought)
If funded from cash, the cost is the after-tax interest forgone. If borrowed, the after-tax interest expense. If the question ignores funding cost, use old net income.
Earnings yield test
EPS rises if after-tax cost of funds < E/P = 1 ÷ (P/E)
Compare the yield on shares bought with the after-tax cost of funds.
BVPS after buyback
New BVPS = (Old equity − Cash spent) ÷ (Old shares − Shares bought)
BVPS falls if the buyback price > old BVPS, and rises if the price < old BVPS.
Old BVPS
BVPS = Shareholders' equity ÷ Shares outstanding
Use the share count before the buyback.
Share price after buyback (fair-value case)
Post-buyback price = (Pre-buyback market cap − Cash spent) ÷ Remaining shares
If bought at the market price, the price is unchanged, so the wealth effect is neutral.

How to solve Share Repurchase Methods and Effects questions

Use this order for any buyback question in a vignette.

  1. 1Read the vignette for net income, shares outstanding, share price, equity, cash spent or shares to buy, and the funding source.
  2. 2Identify the method (open market, tender, Dutch auction, negotiation) and note the price paid, including any premium.
  3. 3Compute shares repurchased as cash spent ÷ price, or cash needed as shares × price.
  4. 4Adjust net income for the after-tax cost of funds (interest forgone or interest paid). Apply the tax rate given.
  5. 5Compute new EPS using the reduced share count, and new BVPS using equity less cash spent.
  6. 6Compare the buyback price with BVPS to judge the direction of BVPS, and with intrinsic value to judge the wealth effect.
  7. 7Answer the specific question, and pick the option that matches your computed direction and size.

Quickest way: Yield test and price-versus-book shortcut

When to use it: When the question asks only for the direction of the effect on EPS or BVPS, or compares options in a three-choice question.

  1. EPS direction: compare E/P (inverse of P/E) with the after-tax cost of funds. If E/P is higher, EPS rises.
  2. BVPS direction: compare the buyback price with current BVPS. Price above book means BVPS falls.
  3. Wealth direction: compare buyback price with intrinsic value. Below intrinsic value helps remaining holders.
  4. Only compute exact figures if the answer options are close in value.

Common mistakes in Share Repurchase Methods and Effects

  • Leaving net income unchanged when the question gives a funding cost.

    Students focus on the share count and forget the cash used earned interest or was borrowed.

    Fix: Subtract the after-tax interest forgone or paid from net income before dividing.

  • Forgetting to apply the tax rate to the interest cost.

    The interest rate is quoted pre-tax and gets used directly.

    Fix: Multiply interest by (1 − tax rate) before adjusting net income.

  • Assuming BVPS always rises after a buyback.

    Fewer shares sounds like a higher per-share figure, as with EPS.

    Fix: Check the price against BVPS. A price above book lowers BVPS.

  • Using the old share count after the buyback.

    Rushing through the steps and reusing the first figure.

    Fix: Always write new shares = old shares − shares bought before computing any per-share figure.

  • Saying a buyback always creates shareholder value.

    EPS rises, so it looks like value was created.

    Fix: Value depends on the price paid versus intrinsic value. A higher EPS from a lower share count is not a gain in itself.

  • Mixing up tender offer and Dutch auction.

    Both are offers to shareholders for a block of shares.

    Fix: Tender offer: one fixed price. Dutch auction: a price range, and the firm picks the lowest clearing price.

Worked examples

Example 1

Vignette: Orbis Corp has net income of $120 million, 60 million shares outstanding, shareholders' equity of $600 million and a share price of $40. It repurchases shares worth $80 million in the open market at $40, funded from cash earning 5% pre-tax. The tax rate is 20%. Questions: (1) Shares repurchased? (2) New EPS? (3) New BVPS?

Show the solution
  1. Shares bought = $80 million ÷ $40 = 2 million. New shares = 58 million.
  2. Interest forgone after tax = $80 million × 5% × (1 − 0.20) = $3.2 million. New net income = $120 million − $3.2 million = $116.8 million.
  3. New EPS = $116.8 million ÷ 58 million = $2.0138, about $2.01. Old EPS = $2.00, so EPS rose slightly.
  4. Old BVPS = $600 million ÷ 60 million = $10.00. New equity = $600 million − $80 million = $520 million.
  5. New BVPS = $520 million ÷ 58 million = $8.97. Price $40 is above BVPS $10, so BVPS fell.

Answer: (1) 2 million shares; (2) EPS about $2.01, up from $2.00; (3) BVPS about $8.97, down from $10.00.

Example 2

Vignette: Calder Ltd has a P/E of 20 and earns on its cash 3% pre-tax. Tax rate is 30%. Management plans a buyback using cash at the current price of €50, which is below the analyst's intrinsic value estimate of €58. Questions: (1) Will EPS rise? (2) Who gains? (3) If the current BVPS is €35, what happens to BVPS?

Show the solution
  1. Earnings yield = 1 ÷ 20 = 5%.
  2. After-tax cost of cash = 3% × (1 − 0.30) = 2.1%.
  3. Because 5% > 2.1%, EPS rises.
  4. The firm buys at €50 versus intrinsic value €58, so it buys below intrinsic value. Remaining shareholders gain, and selling shareholders lose.
  5. Buyback price €50 is above BVPS €35, so BVPS falls.

Answer: (1) EPS rises, since 5% exceeds 2.1%. (2) Remaining shareholders gain, as shares are bought below intrinsic value. (3) BVPS falls, since the price exceeds book value per share.

Exam tips

  • Expect a vignette with a buyback and a dividend alternative. Be ready to compare EPS, BVPS and wealth under both.
  • Read the funding source carefully. Cash, new debt and existing cash change the net income adjustment.
  • Check whether the question uses market price or a tender premium. The price drives share count and BVPS.
  • Use the direction shortcuts first to eliminate options, then compute only if needed.
  • Remember there is no penalty for wrong answers, so answer every question even if you must guess.

Share Repurchase Methods and Effects: frequently asked questions

What are the main share repurchase methods?

The main methods are open market repurchase, fixed-price tender offer, Dutch auction and direct negotiation. Open market buying is the most flexible. Tender offers and Dutch auctions are made to all shareholders, and negotiation targets a specific holder.

How do you calculate EPS after a share repurchase?

Divide adjusted net income by the new share count. Adjusted net income equals old net income less the after-tax cost of the funds used. New shares equal old shares less shares repurchased.

What is the difference between a buyback and a cash dividend?

A dividend pays cash to all shareholders and leaves the share count unchanged. A buyback pays cash only to those who sell and reduces the share count. Under perfect markets at fair value, wealth effects are the same, but taxes, signalling and flexibility differ.

How does a buyback affect book value per share?

Equity falls by the cash spent and shares fall. If the price paid is above current BVPS, BVPS falls. If the price is below BVPS, BVPS rises.