Treasury stock refers to shares of a company's stock that have been issued and subsequently repurchased by that same company. Companies repurchase their own stock for various reasons, such as returning value to shareholders or preventing hostile takeovers. Treasury stock does not have voting rights and the company does not pay dividends on these shares. On the balance sheet, treasury stock is listed as a contra equity account to reduce total shareholders' equity. The number of treasury shares held by a company affects its earnings per share and other financial ratios.
2. Group Members
• Shweta More
• Anuradha Tadas
• Priyanka Mahalle
• Sayali Phatak
• Roshani More
• Nikita Rathod
• B-36
• A-50
• A-28
• B-44
• A-33
• B-46
3. Contents
Treasury stocks as a concept
Importance of Maintaining Treasury stocks
Treasury Stocks and Cash flows Relationship
Limitations of Treasury stocks
Conditions under treasury stocks
Why do companies use treasury stocks?
Treasury stock method
Treasury Management
How is Treasury stock shown in Balance sheet?
Why does it matters?
How does it works exactly ? (Example)
4. Treasury stocks as a concept
Treasury stock is stock repurchased by
the issuer and intended for retirement
or resale to the public. It represents the
difference between the number
of shares issued and the number
of shares outstanding.
5. Importance of Maintaining Treasury stocks
• It offers stock to the employees.
• It keeps devaluated stock off the market.
• It prevents a takeover of the company.
• It reduces in the Earnings Per Share (EPS) of the company.
6. Treasury Stocks and Cash flows Relationship
When Cash Flow is Weak
When Cash Flow is Strong
Liquidation is Done
Maintains the Share Price in
the Market
7. Limitations of Treasury stocks
• A person who is a shareholder of a treasury stock does not have
voting rights.
• They also cannot collect dividends.
• The total amount of treasury stock held by a company cannot exceed
the maximum total capitalization allowed by law.
8. Conditions under treasury stocks
• Treasury stock refers to stock that has been repurchased by the
issuing company.
• These shares do not pay dividends, have no voting rights, and should
not be included in shares outstanding calculations.
• Treasury stock or shares may be purchased by the corporation, or
reacquired through donation, forfeiture, or some other method.
• It is then regarded as the personal property of the corporation and
part of its assets.
• The corporation can sell the stock for cash or credit, for par value or
market value, or upon any terms that it could be sold by a
stockholder.
• Treasury stock is also called reacquired stock or treasury shares.
9. Why do companies use treasury stocks?
i. 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.
ii. 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.)
iii. A company can also repurchase shares to exercise stock options or to convert
convertible bonds.
iv. 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.
v. A company can alter its debt-to-equity ratio by issuing bonds and using the proceeds
to repurchase stock.
vi. A stock buyback could also be a sign that the company has excess cash and no other
viable investment opportunities.
10. Treasury stock method
A. The net of new shares that are potentially created is
calculated by taking the number of shares that the in-the-
money options purchase, then subtracting the number of
common shares that the company can purchase from the
market with the option proceeds. This adds to the total
number of shares in the denominator and lowers the EPS
number.
11. Treasury Stock Method (Example)
In-the- Money Option 10,000 Shares
Exercise Price $ 50
Current Market Price $ 100
Further this needs to be added to the
diluted EPS denominator
The Company will receive:- $ 5,00,000
=10,000 shares *
$50
Allows to Repurchase shares on the
market 5,000 Shares = $ 5,00,000/$ 100
Net new shares 5,000 Shares
= 10,000 Shares –
5,000 Shares
12. Treasury Management
Treasury Management includes a firm's collections, disbursements,
concentration, investment and funding activities.
Bank Treasuries may have the following departments: -
i. A Fixed Income or Money Market desk that is devoted to buying and
selling interest bearing securities
ii. A Foreign Exchange or "FX" desk that buys and sells currencies
iii. A Capital Market or Equities desk that deals in shares listed on the
stock market.
13.
14. How is treasury stock shown in Balance sheet?
• If Treasury Stock Reissued - If a company decides to reissue treasury
stock for a new private placement, the treasury stock basis is the share
price as of the repurchase date. If the treasury stock is revalued and
sold above the basis, the balance sheet shows a debit to cash for all
the money received. In the stockholders' equity section, the treasury
stock account is credited with the total basis price, and the additional
paid-in capital account is credited with the gain.
• If Treasury Stock Reissue Loss - If the treasury stock revalue amount is
less than the basis, the money received is debited to the cash account,
and the loss is debited to the additional paid-in capital account. The
cash amount received and the loss amount are added together and
credited to the treasury stock account.
15. • If Treasury Stock Retirement - If a company decides to retire its treasury
stock, it uses the share price as of the repurchase date as the basis. If the
retirement stock revaluation price is higher than the basis, the balance
sheet shows the transaction as a debit to common stock at the basis
price and a debit to paid-in capital for the amount over the basis.
Treasury stock is credited for the full amount.
• If Treasury Stock Retirement Loss - If the retirement stock revaluation
price is lower than the basis, the transaction is shown as a debit to
common stock at the basis price. A credit is made to paid-in capital for
the amount under the basis and a credit is made to treasury stock at the
basis price.
Continued…How is treasury stock shown in Balance
sheet?
16. Why does it matters?
• Treasury Stock consists of shares issued but not outstanding.
Thus, treasury shares are not included in earnings per share
or dividend calculations, and they do not have voting rights.
• In general, an increase in treasury stock can be a good thing
because it indicates that the company thinks the shares
are undervalued.
• By buying back its stock, a firm reduces the number of shares
outstanding, which in turn gives each shareholder a larger
piece of earnings.
• Likewise, the lower number of shares can improve EPS and
other ratios. However, treasury stock can be abused.
17. How does it works exactly ? (Example)
• Let's assume Company XYZ decides to buy back some of its shares because it feels that
Company XYZ shares are undervalued in the market right now.
• When Company XYZ acquires those shares, they become treasury stock.
• Treasury stock appears at cost or at par value in the shareholders equity section of
the balance sheet and thus appears as a "negative" in the shareholders equity section
(known as a contra equity account).
• It is important to note that if and when income statement recognition of gains or losses
on treasury stock transactions.
• That is, if the company profits (or loses) from the resale of treasury shares, it simply
records an increase in cash and a corresponding decrease in shareholders' equity.
• Note that purchases of treasury stock are uses of cash, and some states limit the amount
of treasury stock a corporation can own at a given time (this ensures that shareholders
do not jeopardize the interests of debtholders).