A company that wants to maximize earnings per share may either over sell assets or Pay off debt.
Select one:
A True
B False
The correct answer and explanation is :
Correct Answer: A. True
A company looking to maximize its earnings per share (EPS) may choose to either sell off assets or pay off debt because both strategies can increase the net income available to shareholders or reduce the number of outstanding shares.
1. Selling Assets to Boost EPS
When a company sells assets, it generates immediate cash inflow, which can be used to either invest in higher-return projects, buy back shares, or distribute dividends. This increases EPS by either increasing net income or reducing the number of outstanding shares. However, this strategy may harm the company’s long-term profitability if essential assets are sold.
For example, if a manufacturing company sells its production plant and leases it back, it may have a short-term profit boost, but higher future lease expenses may reduce long-term earnings.
2. Paying Off Debt to Improve EPS
Reducing debt decreases interest expenses, which directly boosts net income. Since EPS is calculated as:
[
EPS = \frac{\text{Net Income} – \text{Preferred Dividends}}{\text{Outstanding Shares}}
]
a reduction in interest expenses increases net income, leading to higher EPS. Companies with high-interest obligations often find it beneficial to use available cash or proceeds from asset sales to reduce debt and enhance profitability.
Caution on Both Strategies
While these actions can temporarily increase EPS, they may have negative consequences. Selling key assets can limit revenue-generating capacity, and aggressively paying off debt can reduce liquidity, making it difficult to handle unexpected costs. A balanced approach is essential to ensure sustainable long-term growth.
Thus, the statement is true—companies may oversell assets or pay off debt to maximize EPS, but they must do so strategically to avoid harming long-term financial health.