Renegade Clothing is struggling to meet analysts’ forecasts. It’s early December 2024, and the year-end projections are in. Listed below are the projections for the year ended 2024 and the comparable actual amounts for 2023.

Analysts forecast earnings per share for 2024 to be $0.95 per share. It looks like earnings per share will fall short of expectations in 2024. 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 2024 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 2024 will change as follows:

2. Calculate the new projected earnings per share and return on equity for 2024, assuming the company goes through with the treasury stock purchase.
3. Does the purchase of treasury stock near year-end improve earnings per share and the return on equity ratio? Explain.

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Sales Net income Total assets Total liabilities Stockholders' equity Total liabilities and stockholders' equity Shares outstanding at year-end Projected 2024 Actual 2023 $14,000,000 $16,023,000 878,000 1,113,000 $ 6,500,000 $ 2,500,000 4,000,000 $ 6,500,000 950,000 $ 6,821,000 $ 2,396,000 4,425,000 $ 6,821,000 950,000