Financial Accounting
4th Edition
ISBN: 9781259307959
Author: J. David Spiceland, Wayne M Thomas, Don Herrmann
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 10, Problem 10.8APEM
Earnings Management
Renegade Clothing is struggling to meet analysts’ forecasts. It’s early December 2015, and the year-end projections are in. Listed below are the projections for the year ended 2015 and the comparable actual amounts for 2014.
| Projected 2015 | Actual 2014 | |
| Sales | $14,000,000 | $16,023,000 |
| Net income | 878,000 | 1,113,000 |
| Total assets | $ 6,500,000 | $ 6,821.000 |
| Total liabilities | $ 2,500,000 | $ 2,396,000 |
| 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 |
Analysts
Ronald Outlaw, the director of marketing, has a creative idea to improve earnings per share and the return on equity for 2015. He proposes the company borrow additional funds and use the proceeds to repurchase 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 2015 before any repurchase 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 2015 will change as follows:
| 2015 | 2014 | |
| Sales | $14,000,000 | $16,023,000 |
| Net income | 878,000 | 1,113,000 |
| Total assets | $ 6,500,000 | $ 6,821,000 |
| Total liabilities | $ 3,500,000 | $ 2,396,000 |
| Stockholders' equity | 3,000,000 | 4,425,000 |
| Total liabilities and stockholders' equity | $ 6,500,000 | $ 6,821,000 |
| Shares outstanding at year end | 850,000 | 950,000 |
2. Calculate the new projected earnings per share and return on equity for 2015, assuming the company goes through with the
3. Explain how the repurchase of treasury stock near year end improves earnings per share and the return on equity ratio.
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Chapter 10 Solutions
Financial Accounting
Ch. 10 - Corporations typically do not first raise capital...Ch. 10 - What is the difference between a public and a...Ch. 10 - Prob. 3RQCh. 10 - Which form of business organization is most...Ch. 10 - Prob. 5RQCh. 10 - Prob. 6RQCh. 10 - 7.Explain the difference between authorized,...Ch. 10 - Prob. 8RQCh. 10 - Prob. 9RQCh. 10 - What are the three potential features of preferred...
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