Required:
A treasury stock or reacquired stock is stock which is bought
back by the issuing company, reducing the amount of outstanding
stock on the open market.
Following are the reasons the company would want to
purchase treasury stock:
- Too much cash in the books and too few investment opportunities
is a key reason for the purchase of treasury stock.
- Treasury stock helps in reducing the cost of capital.
- It helps in reducing ownership.
- When a company purchase treasury stock, it results in a
reduction of the number of shares outstanding and the capital base.
To the extent, it improves the Earning per share and Return on
equity of the company.
- Benefit from the current undervaluation of stock. i.e
purchasing its own shares at a lower price.