ACCA Advanced Financial Management (AFM) Practice Exam

For what purpose can treasury stock be utilized?

1. To pay ongoing operational expenses

2. To issue stock options

3. To distribute cash dividends

4. To acquire new companies

The correct answer is: To issue stock options

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. One of the significant purposes of holding treasury stock is to use it for issuing stock options. By having shares readily available, a company can provide stock options to employees or executives as part of their compensation packages or incentive plans. This can motivate staff to work towards increasing the company's value since their benefits are directly tied to the performance of the company's stock. This practice also helps companies manage their equity structure by maintaining flexibility in offering shares without needing to issue new stock, which could dilute existing shareholders' equity. Thus, utilizing treasury stock for stock options aligns with compensation strategies and can help in talent retention and motivation, ultimately benefiting the company's performance. The other options do not accurately represent appropriate uses for treasury stock. Treasury shares cannot be used to cover operational expenses directly, distribute cash dividends, or acquire new companies as these purposes typically require cash flow or new shares, not shares previously repurchased.