Treasury Stock Method

What is Treasury Stock Method

Under the treasury stock method, the repurchase of shares is treated as if the company had issued new shares for cash and then immediately bought back an equal number of shares on the open market. The net effect of this transaction is that there are no changes in the number of outstanding shares or in the company’s stockholders’ equity. However, the repurchase does have an impact on earnings per share. Specifically, it reduces both the numerator (net income) and the denominator (number of shares outstanding) in the earnings per share formula. As a result, earnings per share decreases when a company repurchases its own stock.

How to calculate treasury stock method

To calculate this, you will need to know the number of shares repurchased, the average price paid for those shares, and the par value of the shares. The first step is to subtract the number of repurchased shares from the total number of outstanding shares. Then, you will need to divide the par value by the average price paid for the shares. The final step is to multiply this number by the total number of outstanding shares. This will give you the number of additional shares that would need to be repurchased in order to have a fully diluted share count. It is a useful tool for companies that are looking to buy back their own stock. It can help them to determine how many shares need to be repurchased in order to have a positive impact on earnings per share.