Answer: increase.

## Explanation The EPS will **increase** because: **Key Calculation**: - Earnings yield = EPS / Price per share = $3 / $40 = 7.5% - After-tax cost of debt = 7% **Analysis**: - The earnings yield (7.5%) exceeds the after-tax cost of debt (7%) - This creates a positive spread of 0.5% - When the earnings yield > cost of debt, share repurchases financed with debt will increase EPS **Concept**: - The company is essentially borrowing at 7% to buy assets (shares) that earn 7.5% - This creates value and increases earnings per remaining share - The reduction in shares outstanding combined with the positive spread leads to EPS accretion Therefore, the share repurchase will increase EPS.

Author: LeetQuiz .