Question

What does Treasury Stock do to Stockholders Equity and why does it do it?

What are the effects on Stockholders Equity with Cash Dividends, Stock Dividends or Stock Splits. If you were a stockholder which one would you want to receive?

Answer 1

Q (1). What does Treasury Stock do to Stockholders Equity and why does it do it?

Treasury Stock refers to the stock that has been bought back by the company i.e. the difference between the issued stock and the outstanding stock.

It decreases the stockholder's equity.

As treasury stock is just the repurchase of the shares, it is done for decreasing the shareholding in the market of the extra fund received by the company which is not in use and company foresee no particular benefit in keeping the excess fund received from the shareholders.

Q (2). What are the effects on Stockholders Equity with Cash Dividends, Stock Dividends or Stock Splits? If you were a stockholder which one would you want to receive?

Effect on Stockholders Equity with:

1. Cash Dividends: It reduces Stockholders equity because the excess cash is distributed to the shareholders as a result of which equity decrease with the decrease in cash balance.
2. Stock Dividends: It has no effect on the stockholder's equity as additional shares are distributed as the dividend which has no impact on overall stockholders equity.
3. Stock Splits: It also has no effect on the stockholder's equity as it is just the division of shares into specified parts as per the policy of the company which ultimately have no impact on the overall amount of stockholders equity.

If you were a stockholder, which one would you want to receive?

There is no hard and fast rule practically to determine which one is better. It always depends on person to person according to the need of the hour which type of dividend or split he/she wants. So if a person is in need to pull out some investment from the company in the form of cash then it is better to take advantage of cash dividend and he would love to take cash dividend otherwise the person can move to the stock dividend or split whichever is suitable at the moment.