ACCA Advanced Financial Management (AFM) Practice Exam

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What is one potential benefit of reselling treasury stock?

It can limit shareholder equity
It can raise money for the company
It can permanently decrease stockholder equity
It can violate corporate governance rules

The correct answer is: It can raise money for the company

Reselling treasury stock can raise money for the company, making it an important strategy for generating funds. Treasury stock refers to shares that were previously issued and have been repurchased by the company. By reselling these shares back into the market, the company can effectively increase its cash flow, which can be utilized for various purposes such as funding operations, investing in new projects, or reducing debt. This method provides a way for the company to access capital without taking on additional debt or diluting the ownership percentage of existing shareholders significantly, as treasury shares are not considered when calculating earnings per share or dividends. In contrast, limiting shareholder equity, permanently decreasing stockholder equity, or violating corporate governance rules do not broadly characterize the primary benefits of reselling treasury stock. Rather, the strategy is generally viewed within the context of financial flexibility and enhanced liquidity for the company.