CFA CFA Level 1 Why Does Acquiring Treasury Stock Reduce Owner’s Equity?

Why Does Acquiring Treasury Stock Reduce Owner’s Equity?

  • This topic has 3 replies, 3 voices, and was last updated Jan-18 by ufsguy.
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    • shannondaily
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      Wouldn’t it increase owner’s equity, because the dividends aren’t paid to the treasury stock? Thus, more earnings are potentially/eventually spread amongst less shares.

    • shannondaily
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      Found the answer on Investopedia, but couldn’t find it in the Schweser Notes. I feel a little silly. I was totally overthinking it. :blush: 

      “Though investors may benefit from a share price increase, adding treasury stock will – at least in the short-term – actually weaken the company’s balance sheet. To grasp why this is the case, consider the basic accounting equation: Assets – Liabilities = Stockholder’s Equity. The organization has to pay for its own stock with an asset (cash), thereby reducing its equity by an equivalent amount.”

      http://www.investopedia.com/articles/markets/013014/getting-acquainted-treasury-stock.asp

    • Pranav
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      @shannondaily‌ 
      lol
      also, regarding your dividends paid part, dividends paid amount would be less than the price of the equity…

    • ufsguy
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      Treasury stock is a contra-account, posted against Capital Stock and Additional Paid In Capital.

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