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Unit 1 Ethics Case: Purchase of Treasury Stock Rayovac has several debt covenants related to its bonds payable. One covenant requires Rayovac to keep...
Unit 1 Ethics Case: Purchase of Treasury Stock
Rayovac has several debt covenants related to its bonds payable. One covenant
requires Rayovac to keep earnings per share above $5.00. A month before yearend,
Jim Jones, the controller, is working on the 20xx annual report. Based on
estimated earnings and the weighted average number of shares of stock
outstanding, the earnings per share is currently $4.25. Jim believes that the only
way the company can increase earnings per share to reach $5.00 in one month is to
borrow money and purchase treasury stock. If the company borrows money for this
purpose, however, it will find it difficult to negotiate an operating loan during the first
quarter of the next year. (It is expected that the company will need to borrow funds
to meet operational needs for the first quarter of next year.) Jim isn't sure about
purchasing the treasury stock this year because, although it will solve the problem of
debt covenant this month, it will create cash flow problems in the following year.
Prepare response following the four step ethics framework. In addition to
following the framework be sure to also answer the following questions within your
1. Does the purchase of treasury stock have the required outcome on earnings
per share? Explain.
2. If the company violates the debt covenant, what might the creditors do?
3. Would your recommendation to Jim change if Rayovac had excess cash, and
purchasing the treasury stock was one of several alternatives for spending the
4. Would your recommendation to Jim change if the current stock price of
Rayovac stock was unusually high? Why?
5. Would your recommendation to Jim change if the current stock price of
Rayovac stock was at a five-year low? Why?