Teasury Stocks (2) (1).pptx

7/25/2019 Teasury Stocks (2) (1).pptx

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TREASURY STOCK


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Contents

Treasury stocks as a concept

Importance of Maintaining Treasury stocks

Treasury Stocks and Cash o!s Re"ationship

#imitations of Treasury stocks

Conditions under treasury stocks

$hy do companies use treasury stocks%

Treasury stock method

Treasury Management

&o! is Treasury stock sho!n in 'a"ance sheet%

$hy does it matters%

&o! does it !orks e(act"y % )E(amp"e*


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Treasury stocks as a concept

Treasurystockis stockrepurchased ,ythe issuer and intended forretirement or resa"e to the pu,"ic-

It represents the di.erence,et!een the num,erof shares issued and the num,erof shares outstanding-


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Importance of Maintaining Treasury stocks

It ofers stock to the employees.

It keeps devaluated stock of the market.

It prevents a takeover o the company.

It reduces in the Earnings Per Share (EPS) o thecompany.


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Treasury Stocks and Cash o!s Re"ationship

$hen Cash /"o! is $eak

$hen Cash /"o! is Strong

#i0uidation is 1one

Maintains the Share 2rice inthe Market


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#imitations of Treasury stocks

A person !ho is a shareho"der of a treasury stock does no3oting rights-

They a"so cannot co""ect di3idends-

The tota" amount of treasury stock he"d ,y a company cae(ceed the ma(imum tota" capita"i4ation a""o!ed ,y "a!-


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Conditions under treasury stocks

Treasury stock refers to stock that has ,een repurchased ,y the issucompany-

These shares do not pay di3idends5 ha3e no 3oting rights5 and shounot ,e inc"uded in shares outstanding ca"cu"ations-

Treasury stock or shares may ,e purchased ,y the corporation5 or

reac0uired through donation5 forfeiture5 or some other method- It is then regarded as the persona" property of the corporation and p

of its assets-

The corporation can se"" the stock for cash or credit5 for par 3a"ue or

market 3a"ue5 or upon any terms that it cou"d ,e so"d ,y a stockho"d

Treasury stock is a"so ca""ed reac0uired stock or treasury shares-


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E(amp"e on Treasury stock

Many companies like Reliance Industries Limited (RIL) have used treasury stock as a tool to hold sRIL before its merger ith Indian !etrochemicals "orporation Limited (I!"L) held a #$% stake th

its fully&oned investment subsidiaries.

'hen RIL merged ith I!"L through a stock sap deal all I!"L shareholders got RIL shares since

be a part of RIL.

hus RIL*s four subsidiary companies got RIL shares.

+oever since a company cannot hold its on shares a trust as created to hold these shares hich

control of RIL. ,uch trusts ere created by the other five companies also to deal ith similar merger i

-esides RIL many other companies have held their on shares in the form of treasury stock like ! /

its merger ith aypee +otels aypee "ement aiprakash 0nterprises 1u2arat

/n2an "ement the transaction beteen !un2ab ractors and Mahindra 3inance and -!"L hich me

4ochi Refineries.

+oever this treasury stock lacks legal sanctity and has been conveniently used by companies to issu

itself.

Internationally treasury stock has been created by the 5, 54 "hina and many other countries. Ma2

countries have s ecific le islations overnin treasur stock.


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$hy do companies use treasury stocks%

To increase the market value o each share by limiting supp

To provide stock options and bonuses or o!cers andemployees o the company

To have additional shares or the ac"uisition o anothercompany

#r to prevent a takeover by another company.

$se indirect dividend to avoid ta%es.

&i"uidation

'aving too many shares o stock on the market can be bad a company.


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Treasury stock method

The net of ne! shares that are potentia""y created isca"cu"ated ,y taking the num,er of shares that the in6themoney options purchase5 then su,tracting the num,er ofcommon shares that the company can purchase from the

market !ith the option proceeds-This adds to the tota" num,er of shares in the denominat

and "o!ers the E2S num,er-


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Treasury Stock Method )E(amp"e*

In&the& Money 6ption 78888 ,hares

Exercise Price $ 50

Current Market Price $ 100

Further this needs to be added to thediluted EPS denominator

The Company ill recei!e"# $ 500000%10000 sha$50

'llos to (epurchase shares on themarket 5000 Shares % $ 500000

*et ne shares 5000 Shares

% 10000 Sha

5000 Shares


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Treasury Management

Treasury Management inc"udes a 7rm8s co""ectiodis,ursements5 concentration5 in3estment and fundacti3ities-

'ank Treasuries may ha3e the fo""o!ing departments9 6

i- A /i(ed Income or Money Market desk that is de3oted ,uying and se""ing interest ,earing securities

ii- A /oreign E(change or :/;: desk that ,uys and scurrencies

iii- A Capita" Market or E0uities desk that dea"s in shares "istedthe stock market-


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&o! is treasury stock sho!n in 'a"ance sheet%

If Treasury Stock Reissued 6 If a company decides to reissustock for a ne! pri3ate p"acement5 the treasury stock ,asis isprice as of the repurchase date- If the treasury stock is re3a"uea,o3e the ,asis5 the ,a"ance sheet sho!s a de,it to cash money recei3ed- In the stockho"ders8 e0uity section5 the trea

account is credited !ith the tota" ,asis price5 and the additiocapita" account is credited !ith the gain-

If Treasury Stock Reissue #oss 6 If the treasury stock re3a"ue"ess than the ,asis5 the money recei3ed is de,ited to the casand the "oss is de,ited to the additiona" paid6in capita" accountamount recei3ed and the "oss amount are added together and the treasury stock account-


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If Treasury Stock Retirement 6 If a company decides to retirestock5 it uses the share price as of the repurchase date as the retirement stock re3a"uation price is higher than the,a"ance sheet sho!s the transaction as a de,it to common ,asis price and a de,it to paid6in capita" for the amount o3e

Treasury stock is credited for the fu"" amount- If Treasury Stock Retirement #oss 6 If the retirement stock

price is "o!er than the ,asis5 the transaction is sho!n ascommon stock at the ,asis price- A credit is made to paid6ithe amount under the ,asis and a credit is made to treasthe ,asis price-

Continued


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$hy does it matters%

Treasury Stock consists of shares issued ,ut notoutstanding- Thus5 treasury shares are not inc"uded inearnings per share or di3idend ca"cu"ations5 and they donot ha3e 3oting rights-

In genera"5 an increase in treasury stock can ,e a good

thing ,ecause it indicates that the company thinks theshares are under3a"ued-

'y ,uying ,ack its stock5 a 7rm reduces the num,erof shares outstanding5 !hich in turn gi3es each shareho"da "arger piece of earnings-

#ike!ise5 the "o!er num,er of shares can impro3e E2S an

other ratios- &o!e3er5 treasury stock can ,e a,used-


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&o! does it !orks e(act"y % )E(amp"e*

#et8s assume Company ;Y= decides to ,uy ,ack some of its shares ,fee"s that Company ;Y= shares are under3a"ued in the market right n

$hen Company ;Y= ac0uires those shares5 they ,ecome treasury sto

Treasury stock appears at cost or at par 3a"ue in the shareho"ders e0the ,a"ance sheet and thus appears as a :negati3e: in the shareho"desection )kno!n as a contra e0uity account*-

It is important to note that if and !hen income statement recognition"osses on treasury stock transactions-

That is5 if the company pro7ts )or "oses* from the resa"e of treasury ssimp"y records an increase in cash and a corresponding decrease in se0uity-

>ote that purchases of treasury stock are uses of cash5 and some staamount of treasury stock a corporation can o!n at a gi3en time )this

shareho"ders do not ?eopardi4e the interests of de,tho"ders*-


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Thank you

Teasury Stocks (2) (1).pptx

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