Renegade Clothing is struggling to meet analysts’ forecasts. It’s early December 2021, and the year-end projections are in. Listed below are the projections for the year ended 2021 and the comparable actual amounts for 2020.

Analysts forecast earnings per share for 2021 to be $0.95 per share. It looks like earnings per share will fall short of expectations in 2021.

Ronald Outlaw, the director of marketing, has a creative idea to improve earnings per share and the return on equity. He proposes the company borrow additional funds and use the proceeds to purchase some of its own stock—treasury shares. Is this a good idea?

Required:

1. Calculate the projected earnings per share and return on equity for 2021 before any purchase of stock.

Now assume Renegade Clothing borrows $1 million and uses the money to purchase 100,000 shares of its own stock at $10 per share. The projections for 2021 will change as follows:

2. Calculate the new projected earnings per share and return on equity for 2021, assuming the company goes through with the treasury stock purchase.  In computing earnings per share, average shares outstanding is now 900,000 = (850,000 + 950,000)/2.

3. Does the purchase of treasury stock near year-end improves earnings per share and the return on equity ratio? Explain.

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Projected 2021 Actual 2020 Sales $14,000,000 $16,023,000 Net income 878,000 1,113,000 $ 6,500,000 $ 2,500,000 Total assets $ 6,821,000 Total liabilities $ 2,396,000 Stockholders' equity 4,000,000 4,425,000 Total liabilities and stockholders' equity $ 6,500,000 $ 6,821,000 Shares outstanding at year-end 950,000 950,000