Question

For what reasons might a company purchase its own stock? Is the accounting different when a company purchases its own stock, and if so how? How does it affect the stockholders' equity section?

Distinguish among and provide an example of the following terms:

• Cash Dividends
• Property Dividends
• Liquidating Dividends
• Stock Dividends

Why would a company use each of these types of dividends?

Answer 1

Following are the reasons company may repurchase its own shares

• Helps in reducing the cost of capital
• Benefit from the current undervaluation of stock . In simpler words purchasing its own shares at low prices
• Reducing the ownership
• Increasing the earning per share as number of outstanding shares are reduced

Its accounting is also different . Following entry is passed:

Treasury stock DR amount of shares bought back

Cash CR

The above entry reduces the outstanding shares and equity is reduced by the shares bought back

Cash dividend - When cash is distributed to shareholders as dividend . Company may use it when it has surplus cash

Property dividend- When company gives its shareholder property (physical or financial ) as dividend. Company may use it when company has surplus properties

Liquidating dividend- When the company pays dividend out of its paid up capital it is called liquidating dividend. Company may use this dividend to increase its value in the market by giving a higher dividend.

Stock dividend- When shares are issued as dividend. Company may use this type of dividend when it is short of cash