Reacquired stock definition
/What is Reacquired Stock?
Reacquired stock is shares that the issuing entity has purchased back from investors. These shares are no longer classified as being outstanding, and cannot be used to vote on issues brought before shareholders for their approval.
Reasons to Reacquire Stock
There are several reasons why a business might elect to reacquire stock, including the following items:
Alter capital structure. The board of directors might decide to reduce the amount of equity on the balance sheet, which drives up the debt-to-equity ratio of the business. This might be in response to activist investor demands to use more debt.
Greenmail. The board of directors may elect to buy the shares of a hostile acquirer, rather than have it proceed with a buyout bid. This may be at an elevated stock purchase price.
Increase stock price. Buying back shares reduces the number of shares outstanding, which drives up the earnings per share calculation by reducing the denominator in the earnings per share calculation.
Reduce option effects. If options and warrants are being exercised (which creates more shares), then a buyback program can offset the effects of these purchases.
Signal the investment community. The board of directors might want to signal to the investment community that the company’s share price is too low. It can do this by stating that the firm will buy back shares whenever the stock price drops below a certain threshold value.
Use excess cash. The organization may be spinning off more cash than it needs to fund its internal growth, so the board of directors decides to use a portion of it to buy back shares.
Accounting for Reacquired Stock
The amount paid to buy back stock is reported as a contra equity account in the equity section of the issuing company's balance sheet; this is a deduction from the equity balance.
Terms Similar to Reacquired Stock
Reacquired stock is also known as treasury stock.