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treasury stock

Page history last edited by PBworks 11 years, 10 months ago

Treasury stock


stock repurchases


when corporation re-acquires previously owned common shares


why do companies do this:


1. to use in various optoin arrangements stock options. A company may purchase shares from the public and then use them to meet stock option needs, and therefore avoid having to issue brand new stock. This attempts to reduce dilution, and keep a constant earning per share (which investors watch.). But,note: because when someone exercises their options, they have the right to purchase stock at a price significantly less than the current market price of the shares, so the company gets less cash than they would if they issued common stock to the public.


2. invest extra cash.


3. to drive stock price up. When investors see that a company is buying back its shares, they often think that something good is about to happen, so they also buy the stock. This has the effect of driving the price per share up, making all shareholders more money. the company can then resell those shares back on the market and make a profit. Nice thing is that they dont have to and capital gains taxes on those profits. This is because the purchase / sale of treasury stock does not effect the income statement . Instead, it goes directly on the balance sheet (Shareholders equity - treaury stock) and (cash).


4. Defend against an unfriendly takeover. By removing equity from teh market, they in effect; inrease the percentage of debt to equity...and might make the firm seem more risky, thereby reducing the incentive for another company to take them over. Some firms might even borrow money to repurchase shares, and even further increase the percentage of debt to equity...making them even more risky of a takeover target.


5. To distribute cash to investors that might pay less taxes on the sale of stock than on the receipt of dividends.

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