Return on Asset (ROA) =Net Income/ Total Assets TABLE 2: (Refer to Table 1 along with this) DescriptionĮarnings per share = Net income / Number of shares We have calculated some ratios to see the effect. The company might undertake share buyback to boost financial ratios. When the price reaches its intrinsic value, the company may sell the bought back shares and generate profit. The company feels this is just an overreaction, so it buys back some shares. For example, a company’s stock price fell to $30 after bad news. Share buyback sends a positive signal as the company invests in its own shares because it is optimistic about its own future prospects.
The reasons for undervaluation could be sentiments like investors overreacting to bad news, investors’ inability to see future growth prospects, investors giving too much importance to short-term performance, poor economy, etc. When the management perceives their share prices are undervalued, they support the price through share repurchase. Treasury stock value is calculated at par value rather than at cost, i.e., $ 10 million (1 million shares * $ 10).
However, treasury stock is treated differently. In this method, cash on the asset side will be reduced by 15 million. The stock holder’s equity will be directly reduced by the cost of treasury stock, which is also 15 million. The number of shares outstanding will reduce to 3 million, while the treasury stock with the company will be 1 million. The cash required to buy shares from the market would be 15 million (1 million shares * $ 15). Under this method, cash is reduced on the asset side by the amount paid. There are two methods for treating treasury shares. Such shares will not be entitled to receive dividends and voting rights as they are not considered part of outstanding shares.) (Note** Treasury shares are the shares that are repurchased but not retired or canceled. The stock is currently trading at $ 15 per share.Įquity share capital(Par value: $10, Issued at $17)Īdditional paid-in capital : Treasury stock.The par value of the stock is $ 10 per share, and its issue price is $ 17 per share.Company X has 4 million shares outstanding, and it announces the buyback of 1 million shares.
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