The principle of Treasury stock is that when a company repurchases its own shares, it will be shown in the balance sheet as contra equity account. Treasury stock transactions have no effect on the number of shares authorized or issued. The main idea behind repurchasing is to benefit the shareholders and the company.

If a company wants to repurchase certain number of shares, but the money they have is limited. In this case, they will split the shares leading to increase in the number of shares and reducing the market price of one share. When the company feels that the market price is very less, then they opt for Reverse stock split which will decrease the number of shares increasing the market price of one share.

The questions given below are related to Treasury stock, Stock split and Reverse stock split

Question 16

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A company made a two for five reverse stock split. The face value of one share was RO 1. What will be the effect on the shares?

a.

Increases the par value from RO 1 to RO 2.5

b.

The face value of share will increase by 35%.

c.

Increases the market value but there will not be any effect on the par value

d.

The number of shares outstanding increases by 50%

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Question 17

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Fatma SAOG has 400,000 shares in issue at a market price of RO 50 per share. A 6-for-4 stock split was made. After the split, what will be the number of shares outstanding?

a.

600,000 shares

b.

300,000 shares

c.

550,000 shares

d.

266,667 shares

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Question 18

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On March 5, Ahli Corporation repurchased 2000 shares of its outstanding common stock for RO 18 each. On June 1, the company reissued 1600 shares of its treasury stock for RO 23 each. Identify the amount of share premium from Treasury stock on such reissue.

a.

10,000

b.

8000

c.

2000

d.

7200

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Question 19

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On March 5, Dhofar Corporation repurchased 1000 shares of its outstanding common stock for RO 40 each. On August 1, the company reissued 600 shares of its treasury stock for RO 46 each. Identify the amount of share premium from Treasury stock on such reissue.

a.

3600

b.

5700

c.

4000

d.

6000

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Question 20

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Mariya SAOG has 100,000 shares in issue at a market price of RO 7.50 per share. If the company does a 2-for-10 reverse stock split, the market price per share after the reverse split will be:

a.

37.5 per share

b.

10.5 per share

c.

27.5 per share

d.

17.5 per share