Serovan Pharma holds Rs 4,000 crore of net cash and trades at 25x earnings. Rank three uses of the cash: a buyback, an acquisition at 15x EBIT of a business earning a 12% return on capital, or a special dividend.

On value, the buyback and the special dividend tie at no change before tax, and the acquisition is last, losing about Rs 41 a share. The acquisition earns 5% after tax on its Rs 4,000 crore price against an 11% cost of capital; the 12% return is on the target's own books, not on what Serovan pays. On EPS the order reverses, which is why EPS is the wrong test. Tax decides between the buyback and the dividend.

Suppose you move money from a fixed deposit paying 5% after tax into a shop that returns 5% on what you paid. Your monthly income barely changes, so it looks fine, but you now carry a shop's risk for a deposit's return. EPS compares the new income with the old; value compares the return with what that risk of capital should earn. Serovan's cash earns 5.25% after tax. The acquisition earns 5.0%: EBIT of Rs 266.7 crore, one fifteenth of the price, less tax. That keeps EPS nearly flat, but 5% is far below the 11% an operating business must earn.

Take the operating business at your Rs 36,000 crore. A buyback retires 5 crore shares at Rs 800, leaving Rs 36,000 crore across 45 crore shares: still Rs 800 a share, because you bought at fair value. A special dividend hands each holder Rs 80 of cash and leaves Rs 720 of shares, also Rs 800 before tax. The acquisition is worth about Rs 1,944 crore on its cash flows, NOPAT of Rs 200 crore less the reinvestment 5% growth needs at a 12% return, discounted at 11%, so Serovan pays Rs 4,000 crore for about Rs 1,944 crore. Value per share falls to about Rs 759.

Two things. First, price against value: a buyback creates value for the shareholders who stay only if the shares are bought below what they are worth. At your Rs 800 it is neutral; if you valued the operating business at Rs 40,000 crore, the buyback would add about Rs 9 a share, and if at Rs 32,000 crore it would lose value. Second, tax. India has changed how dividends and buybacks are taxed more than once in recent years, and the answer depends on the shareholder's own tax position, so state the framework, that each route is taxed differently in the holder's hands, and confirm the current rules before ranking them.

Close with the principle an interviewer is listening for: judge a use of capital by its return against the cost of capital, then by price against value, and only last by what it does to next year's EPS.