Earnings per share is calculated by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. If net income remains unchanged while the company reduces the share count, earnings per share increases. Option B is correct.

For example, if the company earns $10 million with one million shares outstanding, EPS is $10. If it cancels 100,000 shares and earnings remain $10 million, EPS becomes approximately $11.11. The buyback does not itself increase total corporate earnings, eliminating option C.

Remaining shareholders generally own a larger proportional interest after other shares are cancelled, assuming they did not sell into the repurchase. Option D therefore reverses the normal effect. Option A also reverses the EPS calculation.

A buyback may signal that management believes the shares are undervalued, provide an alternative method of returning capital or offset dilution from employee compensation. However, it does not guarantee an increase in market price. Repurchasing overvalued shares can destroy value, and using excessive cash or debt can weaken the balance sheet.

The Retail Securities syllabus requires candidates to understand share buybacks, stock splits, consolidations, dividend rights and how corporate actions affect shareholder positions.

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