A Possible Result of the Reacquisition and Cancellation of Shares

question 50

Multiple Choice

A possible result of the reacquisition and cancellation of shares by a corporation is that this may

• A) directly increase but not decrease retained earnings.
• B) increase net income if a gain is recognized.
• C) directly decrease but not increase retained earnings.
• D) decrease but not increase net income.

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Definitions:

Unlevered Firm

A company that operates without any debt in its capital structure, relying entirely on equity for financing.

Annual Coupon

The total interest payments received by a bondholder from the issuer each year.

Levered Firm

A company that utilizes debt financing along with equity financing in its capital structure.

Unlevered Value

The value of a firm that is not affected by the decisions of financing, such as the use of debt.