Answer (B) is correct . A purchase of treasury stock involves a decrease in assets (usually cash) and a corresponding decrease in equity. Thus, equity is reduced and the debt-to- equity ratio and financial leverage increase.
Answer (A) is incorrect because Assets decrease when treasury stock is purchased.
Answer (C) is incorrect because A firm’s interest coverage ratio is unaffected. Earnings, interest expense, and taxes will all be the same regardless of the transaction.
Answer (D) is incorrect because The purchase of treasury stock is antidilutive; the same earnings will be spread over fewer shares. Some firms purchase treasury stock for this reason.
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