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When a company buys back its own shares... Numbers Afficionado 02-18-2007
Posted by Numbers Afficionado on February 18, 2007, 4:47 pm
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 This reduced the book value of the company, from what I understand. I
would have thought that the assets side remains the same, and also, if
anything, the liability side goes down and the equity side goes up!

Please explain what happens, from an accounting perspective, to the
balance sheet, and also, the financial ratios of the stock. My
readings indicate that there is an inverse relationship between the
Stock price*No. of Shares = Contstant. Therefore, the market cap is
constant. If the company bought back 50% of the shares, the remaining
shares would double in price.


Posted by Paul Thomas, CPA on February 18, 2007, 5:10 pm
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> This reduced the book value of the company, from what I understand. I
> would have thought that the assets side remains the same, and also, if
> anything, the liability side goes down and the equity side goes up!
>
> Please explain what happens, from an accounting perspective, to the
> balance sheet, and also, the financial ratios of the stock.


Sounds like a homework problem.


The CASH goes down, because the company is paying a shareholder for those
shares.

Those shares get retired, so the book stock goes down.



> My readings indicate that there is an inverse relationship between the
> Stock price*No. of Shares = Contstant. Therefore, the market cap is
> constant. If the company bought back 50% of the shares, the remaining
> shares would double in price.



Or more so.



--
Paul Thomas, CPA
paulthomascpapc@bellsouth.net







Posted by Numbers Afficionado on February 18, 2007, 10:12 pm
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Paul,

Thanks for your great answer, however, I have further questions. By
the way, this is *NOT* a homework problem. I'm not in school,
brother. :)

I totally understand how the cash position goes down, but doesn't
"marketable securities" account (under assets) go *UP*? On the equity
side of things: Sure the common stock goes down.

I would think that the book value per investor (or per share)
increases. The size of the company stays the same.




wrote:
>
> > This reduced the book value of the company, from what I understand. I
> > would have thought that the assets side remains the same, and also, if
> > anything, the liability side goes down and the equity side goes up!
>
> > Please explain what happens, from an accounting perspective, to the
> > balance sheet, and also, the financial ratios of the stock.
>
> Sounds like a homework problem.
>
> The CASH goes down, because the company is paying a shareholder for those
> shares.
>
> Those shares get retired, so the book stock goes down.
>
> > My readings indicate that there is an inverse relationship between the
> > Stock price*No. of Shares = Contstant. Therefore, the market cap is
> > constant. If the company bought back 50% of the shares, the remaining
> > shares would double in price.
>
> Or more so.
>
> --
> Paul Thomas, CPA
> paulthomascp...@bellsouth.net



Posted by Rocinante on February 18, 2007, 10:38 pm
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On 18 Feb 2007 19:12:19 -0800, Numbers Afficionado wrote:

> Paul,
>
> Thanks for your great answer, however, I have further questions. By
> the way, this is *NOT* a homework problem. I'm not in school,
> brother. :)
>
> I totally understand how the cash position goes down, but doesn't
> "marketable securities" account (under assets) go *UP*? On the equity
> side of things: Sure the common stock goes down.
>
> I would think that the book value per investor (or per share)
> increases. The size of the company stays the same.
>
>
>
>
> wrote:
>>
>>> This reduced the book value of the company, from what I understand. I
>>> would have thought that the assets side remains the same, and also, if
>>> anything, the liability side goes down and the equity side goes up!
>>
>>> Please explain what happens, from an accounting perspective, to the
>>> balance sheet, and also, the financial ratios of the stock.
>>
>> Sounds like a homework problem.
>>
>> The CASH goes down, because the company is paying a shareholder for those
>> shares.
>>
>> Those shares get retired, so the book stock goes down.
>>
>>> My readings indicate that there is an inverse relationship between the
>>> Stock price*No. of Shares = Contstant. Therefore, the market cap is
>>> constant. If the company bought back 50% of the shares, the remaining
>>> shares would double in price.
>>
>> Or more so.
>>
>> --
>> Paul Thomas, CPA
>> paulthomascp...@bellsouth.net

Wouldn't treasury stock be valued at par value?
And the remainder goes to the paid in capital account?

--
When you're in it up to your ears, keep your mouth shut!

RocinanteREMOVETHIS@gmail.com
2/18/2007 10:36:30 PM

Posted by Paul Thomas on February 18, 2007, 10:40 pm
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> I totally understand how the cash position goes down, but doesn't
> "marketable securities" account (under assets) go *UP*? On the equity
> side of things: Sure the common stock goes down.


If assets were to go down, on the sole theory that you are buying stock
using cash, then either liabilities have to decrease, or equity has to
decrease, on the theory that assets = liabilities + equity (or so I was
told).




> I would think that the book value per investor (or per share)
> increases. The size of the company stays the same.



What happens in the market place (ie: the stock market) has no relationship
to the book equity of the company. There's a lot more to it than book
equity or even actual liquidation value of the company. Ok, so actual
liquidation may increase some stock prices, but for the better run
companies, they create more worth than what they own minus what they owe, or
what their paper values are.



--
Paul A. Thomas, CPA
Athens, Georgia








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