Question

Dickinson Company has $11,860,000 million in assets. Currently half of these assets are financed with long-term debt at 9.3 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9.3 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable Under Plan D, a $2,965,000 million long-term bond would be sold at an interest rate of 11.3 percent and 370,625 shares of stock would be purchased in the market at $8 per share and retired Under Plan E, 370,625 shares of stock would be sold at $8 per share and the $2,965,000 in proceeds would be used to reduce long-term debt. a. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) Current Plan Plan D Plan E Earnings per share b-1. Compute the earnings per share if return on assets fell to 4.65 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Current Plan D Plan E Earnings per share b-2. Which plan would be most favorable if return on assets fell to 4.65 new plans. perce nt? Consider the current plan and the two Plan D Current Plan Plan E b-3. Compute the earnings per share if return on assets increased to 14.3 percent. (Round your answers to 2 decimal aces Current Plan Plan D Plan E Earnings per share b-4. Which plan would be most favorable if return on assets increased to 14.3 percent? Consider the current plan and the two new plans. Current Plan Plan E Plan D c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,965,000 million in debt will be used to retire stock in Plan D and $2,965,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.3 percent. (Round your answers to 2 decimal places.) Current Plan Plan D Plan E Earnings per share

Answer 1

a.Calculation of EPS:

	Current Plan	Plan D	Plan E
Return before Interest and Tax	1,102,980	1,102,980	1,102,980
Less: Interest	551,490	886,535	275,745
EBT	551,490	216,445	827,235
Less: Tax@40%	220,596	86,578	330,894
Net Income	330,894	129,867	496,341
Number of Shares	741,250	370,625	1,111,875
EPS	0.4464	0.3504	0.4464

b-1

	Current Plan	Plan D	Plan E
Return before Interest and Tax	551,490	551,490	551,490
Less: Interest	551,490	886,535	275,745
EBT	0	-335,045	275,745
Less: Tax@40%	0	-134,018	110,298
Net Income	0	-201,027	165,447
Number of Shares	741,250	370,625	1,111,875
EPS	0	-0.5424	0.1488

b-2.Most favorable will be Plan E

b-3.

	Current Plan	Plan D	Plan E
Return before Interest and Tax	1,695,980	1,695,980	1,695,980
Less: Interest	551,490	886,535	275,745
EBT	1,144,490	809,445	1,420,235
Less: Tax@40%	457,796	323,778	568,094
Net Income	686,694	485,667	852,141
Number of Shares	741,250	370,625	1,111,875
EPS	0.9264	1.3104	0.7664

b-4 Plan D is most favorable