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Difficulty: Very hardEquity Securities and Characteristics

A corporate issuer currently has 10,000,00010,000,000 authorized shares of common stock, 6,000,0006,000,000 issued shares, and 1,000,0001,000,000 shares held in treasury. The board of directors authorizes an open-market share buyback program and successfully repurchases an additional 500,000500,000 shares of common stock. Following the completion of this transaction, what is the new number of outstanding shares, and how are the voting rights and dividend eligibility of the repurchased shares affected?

  1. Outstanding shares decrease to 4,500,0004,500,000; the repurchased shares lose both voting rights and dividend eligibility.Answer
  2. B
    Outstanding shares decrease to 4,500,0004,500,000; the repurchased shares retain voting rights but forfeit dividend eligibility.
  3. C
    Issued shares decrease to 5,500,0005,500,000 while outstanding shares remain at 5,000,0005,000,000; the repurchased shares retain both voting rights and dividend eligibility.
  4. D
    Outstanding shares decrease to 5,500,0005,500,000; the repurchased shares retain dividend eligibility but forfeit voting rights.

Answer

Outstanding shares decrease to 4,500,0004,500,000, and the repurchased shares lose both voting rights and dividend eligibility.
The correct response reflects that outstanding shares equal total issued shares (6,000,0006,000,000) minus total treasury shares (1,500,0001,500,000), yielding 4,500,0004,500,000 shares. Furthermore, repurchased stock held in treasury ceases to have voting power and does not participate in dividend distributions.

Step-by-Step Solution

1
Calculate the initial number of outstanding shares prior to the new buyback.
Initial Outstanding Shares = Issued Shares (6,000,0006,000,000) - Existing Treasury Shares (1,000,0001,000,000) = 5,000,0005,000,000 shares.
Outstanding shares are defined as issued shares minus shares held in the company's treasury.
2
Calculate the new total treasury shares and updated outstanding shares after repurchasing 500,000500,000 shares.
New Treasury Shares = 1,000,000+500,000=1,500,0001,000,000 + 500,000 = 1,500,000 shares. New Outstanding Shares = 6,000,000−1,500,000=4,500,0006,000,000 - 1,500,000 = 4,500,000 shares.
The share repurchase increases treasury stock and reduces the total pool of shares circulating among public investors.
3
Determine the statutory rights of treasury stock.
Treasury shares have no voting rights, do not receive cash or stock dividends, and are excluded from earnings per share (EPS) calculations.
A corporation cannot vote on its own corporate matters nor pay dividends to itself.

Key Concept

Impact of Treasury Stock Repurchases on Capital Structure and Shareholder Rights
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Topics

Equity Securities and Characteristics

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