CFA CFA Level 1 Share Repurchase

Share Repurchase

  • This topic has 7 replies, 7 voices, and was last updated Aug-18 by JWhitmer.
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    • SteveK
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      Hi All,

      Got a question today about Share buybacks.

      I answered that there was no income statement effect – and got the question wrong – but am confused as to why ?

      I dont see the income statement being involved @ all ? Where am I going wrong ?

      Surely its a Assets and Equity transaction on the Balance sheet ?

      Have looked around on the net – cant find a decent explanation anywhere.

      (http://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp) says there is an obvious effect – but I dont see it ?

      Thanks in advance,
      Steve

    • googs1484
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      Hmm…interesting. It’d hit Statement of Stockholders Equity. Not sure about income statement.  

    • daharmattan1
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      I agree with you, it’s solely a balance sheet transaction as it doesn’t affect a company’s revenue or profit.

      When a company buys back stock, it first reduces its cash account on the asset side of the balance sheet by the amount of the buyback. Say a company repurchases 100,000 shares for $50 each. The company would subtract $5 million from its cash balance. In the equity section, the company increases the “treasury stock” account by $5 million. Treasury stock represents money paid out to reacquire stock; it is a “contra equity” account that offsets contributed capital, so increasing treasury stock $5 million has the effect of reducing net contributed capital $5 million. The balance sheet is back in balance.

    • Yeshank
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      maybe the buyback was made with borrowed funds? so the interest costs or ammoritsation of discount or premium over the life of the bond can effect income statement.

    • SteveK
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      Thanks all for the feedback.. glad we see to be on the same page. Its possible I suppose that the question was incorrect.  

    • Kirby18
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      I may be wrong but maybe it deals with EPS? Obviously a lower share count will boost EPS. 

    • carlfox
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      It would effect your income statement. Think about it, how do you buy something? You either pay cash or use credit. both of these things have some kind of interest rate involved and last time I checked interest expense/gain is on the income statement

    • JWhitmer
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      A share repurchase reduces future dividend payments, if they were paid in the first place. That’s a possibility.

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