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When a company buys back its own shares...

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.

Reply to
Numbers Afficionado
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"Numbers Afficionado" wrote

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.

Or more so.

Reply to
Paul Thomas, CPA

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.

Reply to
Numbers Afficionado

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

Reply to
Rocinante

"Numbers Afficionado" wrote

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).

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.

Reply to
Paul Thomas

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