Treasury stock purchases reduce the number of shares outstanding, thereby increasing earnings per share.
True or False
Treasury stock purchases reduce the number of shares outstanding, leading to an increase in earnings per share, assuming net income does not change. This relationship is a key concept in corporate finance. Therefore, the statement is True.
Treasury stock refers to shares that were once a part of the outstanding shares of a company but were later repurchased by the company itself. When a company buys back its own shares, these shares become treasury stock and are typically not counted in the calculation of earnings per share (EPS).
Because treasury stocks reduce the number of shares outstanding, they can lead to an increase in earnings per share (EPS), assuming net income remains constant. EPS is calculated as follows:
As a result, if a company has a net income of $1,000,000 and initially has 1,000,000 shares outstanding, the EPS would be $1.00. If the company repurchases 100,000 shares, it now has 900,000 shares outstanding, and the EPS would then increase to approximately $1.11 ($1,000,000 / 900,000).
Thus, it is True that treasury stock purchases reduce the number of shares outstanding and increase earnings per share.
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