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Treasury Stock and its Impact on Corporate Financial Management

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Treasury stock, or reacquired stock, is when a corporation buys back shares from shareholders, affecting financial ratios like EPS and ROE. It's a strategic tool for managing ownership, enhancing firm value, and planning for future needs such as employee compensation. The text explores the financial effects, accounting practices, and strategic influence of treasury stock, including case studies from major companies and risk management in stock repurchase programs.

Understanding the Concept of Treasury Stock

Treasury stock, also known as reacquired stock, refers to shares that a corporation has repurchased from its shareholders. These shares differ from outstanding stock, which includes all shares currently owned by shareholders, both public and internal to the company. Treasury stock is not considered part of the outstanding shares because it is held by the company itself and is not available for public trading, which influences the company's financial ratios and shareholder equity. Corporations may buy back stock for various strategic reasons, such as to boost earnings per share (EPS), utilize surplus cash, supply shares for employee compensation plans, or defend against hostile takeover attempts.
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Financial Effects of Stock Repurchase

Repurchasing stock has immediate consequences on a company's financial statements. It decreases the number of shares outstanding, effectively increasing the ownership percentage of the remaining shareholders. This can result in a higher EPS, as the net income is divided among a reduced number of shares. For instance, if a company with 100,000 outstanding shares repurchases 20,000 of them, the EPS would rise from $5.00 to $6.25, assuming net income remains unchanged. An increased EPS can make the company more appealing to investors, potentially leading to an appreciation in stock price and overall market capitalization.

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00

Reasons for a corporation to buy back stock

Boost EPS, utilize surplus cash, provide employee compensation, prevent hostile takeovers.

01

Impact of treasury stock on financial ratios

Reduces outstanding shares, can increase EPS and return on equity, alters debt-to-equity ratio.

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Treasury stock and shareholder equity

Treasury stock reduces total shareholder equity, as repurchased shares are deducted from equity.

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