Share Repurchases

CFA Level II Corporate Finance
#1

I’m sure this is a pretty basic concept, but so far I’ve just learned it withouth thinking about it. Here I go:

As far as I know share repurchases are company’s shares bought by the company itself, but those shares “dissapear”, “do not count”, etc. Therefore, I understand that this action increases leverage (equity dissapears, there is more liability component on the liability side), but honestly I don’t get to see where those shares go, or maybe there is something that I’m missing here.

Thanks!

#2

They generally go into Treasury stock (a contra equity account) from which they can be resold.

#3

Thanks for that S2000magician! However, I still have some doubts… why is it a contra equity account? If it is something from which the company can earn money, I don’t see why it subtracts value to the company.

It is true that if you see it from the perspective of the accounting equation, it has to be that way: decrease of cash should decrease equity otherwise the relationship A=E+L does not hold.

Thanks!

#4

It doesn’t subtract value from the company (except to the extent that they had to pay cash to get the stock); it subtracts value from _ external ownership _ of the company, which is what equity represents.