A company issues $100M of debt to buy back stock: walk me through the three statements

On the day of the transaction, nothing hits the income statement. On the cash flow statement, both legs sit in financing activities: issuing debt brings in $100M and repurchasing shares uses $100M, so net change in cash is zero. On the balance sheet, assets are unchanged, debt rises by $100M, and shareholders' equity falls by $100M through treasury stock. Liabilities plus equity are unchanged, so it balances.

Over the following year, the company pays interest. If the rate is 6%, interest expense is $6M, pre-tax income falls by $6M, and net income falls by $4.5M at a 25% tax rate. Cash falls by $4.5M through the cash flow statement, and retained earnings fall by $4.5M on the balance sheet.

The interesting question is EPS. Net income is lower, but there are fewer shares. The buyback is accretive if the after-tax cost of debt, here 4.5%, is lower than the earnings yield on the shares repurchased, which is earnings per share divided by the share price. A company trading at 15 times earnings has an earnings yield of about 6.7%, so this buyback would raise EPS.