Question

We all understand why a company would sell stock in order to raise cash, but why would a company use cash to buy back its own stock? What is the advantage or reason for a company to deal in "Treasury Stock"? (Hint: watch the instructor video on Treasury stock before you answer.)  

Explain (in two or three sentences) the difference "Why Treasury Stock?" - Please give more than a one sentence response.

Answer 1

1. Reasons for buyback :

- it is preferred way of giving dividend to shareholders in form of returning cash.

- another reason is to increase equity value and increase earning per share of company.

- it boosts there key financial ratios .

- presrves the stock price even if economy dips into recession.

- if stock is undervalued , buyback may lead to increase in value.

- for important decision making by promotors, they requre voting rights , buyback helps to increase there power.

2. Treasury stock is outstanding stock that have been repurchased by the company who issued such stock. These are now not the part of company's equity shareholder capital. Company is not liable to pay dividend on the same.

3. Advantage of treasury stock:-

-it is stick kept aside for raising funds in future.

- it can be used for any acquisition of assests or competing business or any investments.

- they can be reissue to existing shareholders to avoid dilution .