Reference no: EM132863345

Question - Jo owns around 10% of the common stock shares in XYZ Company. Jo has access to all the 10-Ks and 10-Qs that XYZ has filed in the past. Generally, Jo looks at the income statement, checks if there is a profit, and calls it a day. Occasionally Jo will look at the balance sheet. While looking for the income statement in the latest 10-K Jo finds the statement of stockholders' equity. Jo is concerned by the negative amount listed as treasury stock and the increase in that activity for the current year. When Jo finds the income statement it's discovered that the results are virtually the same as the previous year, but the earnings per share is reported as being higher. Jo's concerned that there is monkey business going on.

REQUIRED - Explain why a company might purchase treasury stock, the potential impact if any to ROE, and if Jo's correct that when net income is virtually the same from one year to the next then earnings per share should also be the same.