ppt

1. TREASURY STOCK

2. Contents
 Treasury stocks as a concept
 Importance of Maintaining Treasury stocks
 Treasury Stocks and Cash flows Relationship
 Limitations of Treasury stocks
 Conditions under treasury stocks
 Why do companies use treasury stocks?
 Treasury stock method
 Treasury Management
 How is Treasury stock shown in Balance sheet?
 Why does it matters?
 How does it works exactly ? (Example)

3. Treasury stocks as a concept
• Treasury stock is stock repurchased
by the issuer and intended for
retirement or resale to the public.
• It represents the difference between
the number of shares issued and the
number of shares outstanding.

4. Importance of Maintaining Treasury stocks
• It offers stock to the employees.
• It keeps devaluated stock off the market.
• It prevents a takeover of the company.
• It reduces in the Earnings Per Share (EPS) of the company.

5. Treasury Stocks and Cash flows Relationship
When Cash Flow is Weak
When Cash Flow is Strong
Liquidation is Done
Maintains the Share Price in
the Market

6. Limitations of Treasury stocks
• A person who is a shareholder of a treasury stock does not have
voting rights.
• They also cannot collect dividends.
• The total amount of treasury stock held by a company cannot exceed
the maximum total capitalization allowed by law.

7. Conditions under treasury stocks
• Treasury stock refers to stock that has been repurchased by the
issuing company.
• These shares do not pay dividends, have no voting rights, and should
not be included in shares outstanding calculations.
• Treasury stock or shares may be purchased by the corporation, or
reacquired through donation, forfeiture, or some other method.
• It is then regarded as the personal property of the corporation and
part of its assets.
• The corporation can sell the stock for cash or credit, for par value or
market value, or upon any terms that it could be sold by a
stockholder.
• Treasury stock is also called reacquired stock or treasury shares.

8. Example on Treasury stock
• Many companies like Reliance Industries Limited (“RIL”) have used treasury stock as a tool to hold shares for
itself. RIL before its merger with Indian Petrochemicals Corporation Limited (“IPCL”) held a 46% stake through
four of its fully-owned investment subsidiaries.
• When RIL merged with IPCL, through a stock swap deal, all IPCL shareholders got RIL shares since IPCL would
be a part of RIL.
• Thus RIL's four subsidiary companies got RIL shares.
• However, since a company cannot hold its own shares, a trust was created to hold these shares which were under the
control of RIL. Such trusts were created by the other five companies also to deal with similar merger issues.
• Besides RIL many other companies have held their own shares in the form of treasury stock like JPAssociates and
its merger with Jaypee Hotels, Jaypee Cement, Jaiprakash Enterprises, Gujarat
• Anjan Cement, the transaction between Punjab Tractors and Mahindra Finance and BPCL which merged with
Kochi Refineries.
• However, this treasury stock lacks legal sanctity and has been conveniently used by companies to issue shares to
itself.
• Internationally, treasury stock has been created by the US, UK, China and many other countries. Majority of these
countries have specific legislations governing treasury stock.

9. Why do companies use treasury stocks?
• To increase the market value of each share by limiting supply;
• To provide stock options and bonuses for officers and
employees of the company;
• To have additional shares for the acquisition of another
company;
• Or to prevent a takeover by another company.
• Use indirect dividend to avoid taxes.
• Liquidation
• Having too many shares of stock on the market can be bad for
a company.

10. Treasury stock method
• The net of new shares that are potentially created is calculated
by taking the number of shares that the in-the-money options
purchase, then subtracting the number of common shares that
the company can purchase from the market with the option
proceeds.
• This adds to the total number of shares in the denominator and
lowers the EPS number.

11. Treasury Stock Method (Example)
In-the- Money Option 10,000 Shares
Exercise Price $ 50
Current Market Price $ 100
Further this needs to be added to the
diluted EPS denominator
The Company will receive:- $ 5,00,000
=10,000 shares *
$50
Allows to Repurchase shares on the
market 5,000 Shares = $ 5,00,000/$ 100
Net new shares 5,000 Shares
= 10,000 Shares –
5,000 Shares

12. Treasury Management
 Treasury Management includes a firm's collections, disbursements,
concentration, investment and funding activities.
 Bank Treasuries may have the following departments: -
i. A Fixed Income or Money Market desk that is devoted to buying
and selling interest bearing securities
ii. A Foreign Exchange or "FX" desk that buys and sells currencies
iii. A Capital Market or Equities desk that deals in shares listed on the
stock market.

14. How is treasury stock shown in Balance sheet?
• If Treasury Stock Reissued - If a company decides to reissue treasury
stock for a new private placement, the treasury stock basis is the share
price as of the repurchase date. If the treasury stock is revalued and
sold above the basis, the balance sheet shows a debit to cash for all
the money received. In the stockholders' equity section, the treasury
stock account is credited with the total basis price, and the additional
paid-in capital account is credited with the gain.
• If Treasury Stock Reissue Loss - If the treasury stock revalue amount is
less than the basis, the money received is debited to the cash account,
and the loss is debited to the additional paid-in capital account. The
cash amount received and the loss amount are added together and
credited to the treasury stock account.

15. • If Treasury Stock Retirement - If a company decides to retire its treasury
stock, it uses the share price as of the repurchase date as the basis. If the
retirement stock revaluation price is higher than the basis, the balance
sheet shows the transaction as a debit to common stock at the basis
price and a debit to paid-in capital for the amount over the basis.
Treasury stock is credited for the full amount.
• If Treasury Stock Retirement Loss - If the retirement stock revaluation
price is lower than the basis, the transaction is shown as a debit to
common stock at the basis price. A credit is made to paid-in capital for
the amount under the basis and a credit is made to treasury stock at the
basis price.
Continued…How is treasury stock shown in Balance
sheet?

16. Why does it matters?
• Treasury Stock consists of shares issued but not outstanding.
Thus, treasury shares are not included in earnings per share
or dividend calculations, and they do not have voting rights.
• In general, an increase in treasury stock can be a good thing
because it indicates that the company thinks the shares
are undervalued.
• By buying back its stock, a firm reduces the number of shares
outstanding, which in turn gives each shareholder a larger
piece of earnings.
• Likewise, the lower number of shares can improve EPS and
other ratios. However, treasury stock can be abused.

17. How does it works exactly ? (Example)
• Let's assume Company XYZ decides to buy back some of its shares because it feels that
Company XYZ shares are undervalued in the market right now.
• When Company XYZ acquires those shares, they become treasury stock.
• Treasury stock appears at cost or at par value in the shareholders equity section of
the balance sheet and thus appears as a "negative" in the shareholders equity section
(known as a contra equity account).
• It is important to note that if and when income statement recognition of gains or losses
on treasury stock transactions.
• That is, if the company profits (or loses) from the resale of treasury shares, it simply
records an increase in cash and a corresponding decrease in shareholders' equity.
• Note that purchases of treasury stock are uses of cash, and some states limit the amount
of treasury stock a corporation can own at a given time (this ensures that shareholders
do not jeopardize the interests of debtholders).

18. Thank you