Question

"Stock Reacquisition" Please respond to the following:

From the e-Activity, briefly outline the details of the stock reacquisition, and give your opinion of whether or not the stock reacquisition created value for the corporation that you researched. Provide a rationale to support your opinion.

Imagine that you are conducting a study session with your colleagues, and they are unsure of the reasons why a company would reacquire its own stock. Explain the main reasons why corporations repurchase their own stock, and analyze the two (2) methods geared towards accounting for the repurchase of stock. Give your opinion of the method that you would prefer the most. Justify your response.

Answer 1

According to Cornell (2011), stock exchange is the process by which stock, bonds and other securities are bought and sold via the stock exchange market. Stock reacquisition on the other hand is the process by which a company buys back its own stock. The reacquiring of stock by a company that had recently sold them happens for various reasons and they are discussed below.

Main reasons why corporations repurchase their own stock:-
1) One of the common reasons why companies go for re-acquisition of stock is to boost earnings per share (EPS), because re-acquisition reduces outstanding shares in the market.
2) Another common reason for companies to go for re-acquisition is to distribute excess cash to shareholders because the tender offer is usually more than the current price.
3) At times when the company feels the stock values are undervalued, a re-acquisition is used to pump up the stock price, which acts like a support or new base for the stock.
4)Stock re-acquisition makes sense for companies, because of tax arbitrage opportunities, where the programme delivers a higher value to shareholders compared to a dividend distribution.

Two general methods of handling treasury stock in the accounts :-
1) The Cost Method
2) The Par(Stated) Value Method

The Cost Method:-

The cost method requires you to establish a treasury stock account. This is a contra-equity account -- its balance reduces the net amount of outstanding stock without changing the balance of the stock account. You charge the money you spent reacquiring shares to the treasury stock account. You can reissue treasury shares. If you do so for more than the cost of reacquisition, you book the gain to paid-in capital. If you reissue at a loss, you book the loss first to paid-in capital and, if necessary, to retained earnings. You might choose the cost method if you don’t plan to retire the treasury shares.

The Par Value Method:-

Many states require publicly issued stock to carry a par, or stated, value. Other states allow for no-par stock, but these shares can still have a stated value. In the par value method, you carry treasury shares at par or stated value, which might be a very small amount. Common stock frequently has a par value of under a penny per share. You charge the difference between the reacquisition price and par value to the additional paid-in capital account. If you exhaust that account, you charge the balance to retained earnings, which are the accumulated profits of the company.