Which of the following is a reason a company would acquire treasury stock?

• A. To issue additional shares to the public to raise capital
• B. To pay off long-term debt obligations
• C. To increase earnings per share by reducing the number of shares outstanding
• D. To distribute dividends to shareholders

Answer: (C)

Verified step by step guidance

1. Understand the concept of treasury stock: Treasury stock refers to shares that a company has repurchased from its shareholders and holds in its own treasury. These shares are not considered outstanding and do not have voting rights or receive dividends.
2. Review the reasons why companies acquire treasury stock: Common reasons include increasing earnings per share (EPS) by reducing the number of shares outstanding, providing shares for employee stock compensation plans, or preparing for future mergers or acquisitions.
3. Analyze the options provided in the question: Evaluate each option to determine if it aligns with the purpose of acquiring treasury stock. For example, issuing additional shares to raise capital contradicts the concept of treasury stock, as treasury stock involves repurchasing shares rather than issuing them.
4. Focus on the correct answer: The correct reason for acquiring treasury stock in this case is 'To increase earnings per share by reducing the number of shares outstanding.' This is because repurchasing shares reduces the denominator in the EPS calculation, potentially increasing the EPS value.
5. Clarify why other options are incorrect: For instance, paying off long-term debt obligations is unrelated to treasury stock, and distributing dividends to shareholders is not a function of treasury stock, as treasury shares do not receive dividends.