Friday, 20 January 2012

Treasury Stock

Treasury Stock (Repurchased Shares):
When a company buys shares of its own stock on the open market, those shares are referred to as treasury stock.

Shares of treasury stock were issued by the company, and then repurchased. So treasury stock is considered issued, but not outstanding. After a company repurchases shares of its own stock, there are fewer shares of its stock trading on the open market.

Treasury stock can either be retired (cancelled) or resold on the open market. The shares have no voting rights and they do not pay or accrue dividends. Treasury stock is not included in financial ratios that use the value of common stock.

Treasury Stock on the Balance Sheet:
Treasury stock is recorded in the owner’s equity section of the balance sheet. It is recorded at cost – what the company paid to acquire the shares – and the value of the treasury stock is subtracted from the stockholders’ equity account. The treasury stock account is a contra-equity account.

Stock Buyback (Repurchase Shares; Buyback Shares):
There are several reasons why a company would repurchase its own shares.

1. A company might buyback shares if it considers its stock undervalued. If the stock is undervalued, management might want to buy shares because they consider them cheap.

2. Fewer outstanding shares increase the value per share, so a company might buyback shares to benefit its shareholders. For tax reasons, a share buyback can be superior to paying dividends to shareholders. (Depending on the difference between the tax rate that applies to dividends and the tax rate that applies to capital gains.)

3. A company can also repurchase shares to exercise stock options or to convert convertible bonds.

4. Stock buyback can be used to thwart a takeover – if a company buys its own stock, that stock is no longer available to the potential acquirer.

5. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds to repurchase stock.

6. A stock buyback could also be a sign that the company has excess cash and no other viable investment opportunities.

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