CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

The purchase of treasury stock ______
A. increases total stockholders' equity and increases the number of outstanding shares.
B. affects a company's legal capital.
C. Neither of these statements is true.
Explanation: The purchase of treasury shares decreases total stockholders' equity. It also decreases the number of outstanding shares but does not affect a company's legal capital.

User Contributed Comments 8

User Comment
oregon Legal capital is what a company registers with authorities. It can be very different from the real contributed capital.
chamad What's legal capital? I tought B is correct scince contributed capital is reduced?
cleopatraliao note purchase treasury stock i.e. own shares repurchased
lonepine i'm really confused, if you buy back shares you use up retained earings or whatnot, but your B/S should show increased treasury stock which is a component of shareholders equity no?
jnptrsn1 Shucks, I wasnt sure whether to read that as the company or some other investor buying shares of the treasury stock.
jjhigdon How would an investor buy treasury stock? :/
ecapocas That's wrong. For example, if a financial institution performs a share buyback, it reduces the amount of cash on hand which in turn reduces both Tier 1 and Tier 2 regulatory capital as is used to calculate their liquidity requirements for regulators.
ecapocas Additionally shareholder's equity DOES impact regulatory capital for that type of business.
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