tock repurchases occur when a company buys its outstanding stock which is often referred to as treasury stock and is reported as a negative value on the company’s balance sheet. In a share repurchase, firms use excess cash to buy shares back from investors. These shares are to be held in the corporate treasury and resold if the company needs money. There are several approaches to conducting share repurchases. Consider the following situation: The firm announces its intention to buy shares of its own stock, like an ordinary investor, and proceeds to do so. What method is described in the preceding situation? Auction Tender offer Open-market transaction Direct negotiation In a taxless world with no brokerage costs, repurchases and dividends have the same effect on shareholder wealth. In the real world, however, repurchases provide more preferable tax treatment than dividends to ordinary investors. Does this mean that firms should always use share repurchases so that investors can gain from this tax benefit? No Yes If you were to look at a firm’s cash distributions to its shareholders over time, which method of cash distribution is more likely to be used if the firm experiences volatile business cycles? The use of stock repurchases The payment of cash dividends

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Stock repurchases occur when a company buys its outstanding stock which is often referred to as treasury stock and is reported as a negative value on the company’s balance sheet.

In a share repurchase, firms use excess cash to buy shares back from investors. These shares are to be held in the corporate treasury and resold if the company needs money. There are several approaches to conducting share repurchases.

Consider the following situation:

The firm announces its intention to buy shares of its own stock, like an ordinary investor, and proceeds to do so.

What method is described in the preceding situation?

Auction

Tender offer

Open-market transaction

Direct negotiation

In a taxless world with no brokerage costs, repurchases and dividends have the same effect on shareholder wealth. In the real world, however, repurchases provide more preferable tax treatment than dividends to ordinary investors. Does this mean that firms should always use share repurchases so that investors can gain from this tax benefit?

Yes

If you were to look at a firm’s cash distributions to its shareholders over time, which method of cash distribution is more likely to be used if the firm experiences volatile business cycles?

The use of stock repurchases

The payment of cash dividends

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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1. The answer is Open-market operation.

Under the open-market operation, the company will announce its intention of share repurchase and then purchase its share from the market over a period of time.

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