What earnings does a company use to repurchase stock? Earnings available to stockholders/retained earnings?

Question

I would imagine the Earnings Available to Stockholders would be used to work out the dividends paid out but what if the company wanted to repurchase stock - would they dip into their retained earnings?

Answer 1

Cash is debited (decreased) when stock is repurchased.  The cash can only come from two sources, retained earnings. or borrowed funds.

Free cash flow is already part of retained earnings.  Its just a calculation.

If the company reissues the stock there are two basic methods used.  The par value method and the cost method.  They both involve, cash, contributed capital and retained earnings.  These are all balance sheet accounts.

Answer 2

cash is cash.

excess fcf can be used to give shareholders a "voluntary dividend" in the form of a buyback rather than being tossed into retained earnings.  likewise, retained earnings can be tapped if the company wants to do a buyback larger than it's excess fcf.  if the board thought it prudent, they could even use the proceeds from a bond sale to repurchase stock.

it really doesn't matter, though.

Answer 3

as WSC says, it's a cash expenditure that would show up in the balance sheet as a decline in cash, and also in the Financing section of the STatemetn of Cash Flows.

However, if the company was speculating on its own stock to earn money say when it buys back the stock believing it's undervalued and then selling it after it goes up, it might show up on the income statement (and thus earnings) as a gain on the sale of securities.  I know there are some instances where this is true, even in the case of treasury stock.

Answer 4

They use their cash.  It shows up on the balance sheet with a lower cash balance and lower outstanding shares when future earnings are computed.

It has nothing to do with any kind of earnings, other than positively influencing future earnings per share computations due to a smaller denominator.