Question

please do a little research and find out something about treasury stock. Find out the ramifications of a company repurchasing their own stock. What effect does that have? Are there any issues surrounding treasury stock?

If you use an outside source please make sure you cite the source.

Remember all original posts need to be between 250-500 words.

Answer 1

Treasury stock:

A treasury stock or reacquired stock is stock which is also bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).

Stock repurchases are used as a tax efficient method to put cash into shareholders' hands, rather than paying dividends, in jurisdictions that treat capital gains more favorably. Sometimes, companies do it when they feel that their stock is undervalued on the open market. Other times, companies do it to reduce dilution from incentive compensation plans for employees. Another motive for stock repurchase is to protect the company against a takeover threat.

Ramifications of a company repurchasing their own stock

Stock buybacks refer to the repurchasing of shares of stock by the company that issued them. A buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors. With stock buybacks, aka share buybacks, the company can purchase the stock on the open market or from its shareholders directly. In recent decades, share buybacks have overtaken dividends as a preferred way to return cash to shareholders. Though smaller companies may choose to exercise buybacks, blue-chip companies are much more likely to do so because of the cost involved.

Reasons for Buybacks

Since companies raise equity capital through the sale of common and preferred shares, it may seem counter-intuitive that a business might choose to give that money back. However, there are numerous reasons why it may be beneficial to a company to repurchase its shares, including ownership consolidation, undervaluation, and boosting its key financial ratios.

Ramifications: A stock buyback affects a company's credit rating if it has to borrow money to repurchase the shares. Many companies finance stock buybacks because the loan interest is tax-deductible. However, debt obligations drain cash reserves, which are frequently needed when economic winds shift against a company. For this reason, credit reporting agencies view such-financed stock buybacks in a negative light: They do not see boosting EPS or capitalizing on undervalued shares as good justification for taking on debt. A downgrade in credit rating often follows such a maneuver.

Effects:

Despite the above, buybacks can be good for a company's economics. How about the economy as a whole? Stock buybacks can have a mildly positive effect on the economy overall. They tend to have a much more direct and positive effect on the financial economy, as they lead to rising stock prices. But in many ways, the financial economy feeds into the real economy and vice versa. Research has shown that increases in the stock market have an ameliorative effect on consumer confidence, consumption and major purchases, a phenomenon dubbed "the wealth effect."

Another way improvements in the financial economy impact the real economy is through lower borrowing costs for corporations. In turn, these corporations are more likely to expand operations or spend on research and development. These activities lead to increased hiring and incomes. For individuals, improvements in the household balance sheet enhance chances they leverage up to borrow to buy a house or start a business.

Issues surrounding treasury stock:

When a business buys back its own shares, these shares become “treasury stock” and are decommissioned.

• In and of itself, treasury stock doesn’t have much value.
• These stocks do not have voting rights and do not pay any distributions.
• A stock buyback affects a company's credit rating
• Tend to have a much more direct and positive effect on the financial economy, as they lead to rising stock prices.
• effect on consumer confidence, consumption and major purchases