Question

Dickinson Company has $12,020,000 million in assets. Currently half of these assets are financed with long- erm debt at 10.1 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 eams a return on assets before interest and taxes of 10.1 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3,005,000 million long-term bond would be sold at an interest rate of 12.1 percent and 375,625 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 375,625 shares of stock would be sold at $8 per share and the $3,005,000 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.) Answer is complete and correct. Current Plan D Plan E Plan Eamings per share 0.48 0.39 0.48 us b-1. Compute the earnings per share if return on assets fell to 5.05 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Answer is complete but not entirely correct Current Plan D Plan E Eamings per share 2 3 4 5 6 9

Answer 1

a)		Current Plan	Plan D	Plan E
	EBIT (12020000*10.1%)	1214020	1214020	1214020
	Interest:
	= 6010000*10.1% =	607010
	= 6010000*10.1%+3005000*12.1% =		970615
	= (6010000-3005000)*10.1% =			303505
	EBT	607010	243405	910515
	Tax at 40%	242804	97362	364206
	NI	364206	146043	546309
	# of shares:
	= 6010000/8 =	751250
	= 751250-375625 =		375625
	= 751250+375625 =			1126875
	EPS	$               0.48	$           0.39	$              0.48
b-1)		Current Plan	Plan D	Plan E
	EBIT (12020000*5.05%)	607010	607010	607010
	Interest:
	= 6010000*10.1% =	607010
	= 6010000*10.1%+3005000*12.1% =		970615
	= (6010000-3005000)*10.1% =			303505
	EBT	0	-363605	303505
	Tax at 40%	0	-145442	121402
	NI	0	-218163	182103
	# of shares:
	= 6010000/8 =	751250
	= 751250-375625 =		375625
	= 751250+375625 =			1126875
	EPS	$                    -	$         -0.58	$              0.16
b-3)		Current Plan	Plan D	Plan E
	EBIT (12020000*15.10%)	1815020	1815020	1815020
	Interest:
	= 6010000*10.1% =	607010
	= 6010000*10.1%+3005000*12.1% =		970615
	= (6010000-3005000)*10.1% =			303505
	EBT	1208010	844405	1511515
	Tax at 40%	483204	337762	604606
	NI	724806	506643	906909
	# of shares:
	= 6010000/8 =	751250
	= 751250-375625 =		375625
	= 751250+375625 =			1126875
	EPS	$               0.96	$           1.35	$              0.80
b-4)	Plan D
c-1)		Current Plan	Plan D	Plan E
	EBIT (12020000*15.10%)	1815020	1815020	1815020
	Interest:
	= 6010000*10.1% =	607010
	= 6010000*10.1%+3005000*12.1% =		970615
	= (6010000-3005000)*10.1% =			303505
	EBT	1208010	844405	1511515
	Tax at 40%	483204	337762	604606
	NI	724806	506643	906909
	# of shares:
	= 6010000/8 =	751250
	= 751250-3005000/10 =		450750
	= 751250+3005000/10 =			1051750
	EPS	$               0.96	$           1.12	$              0.86
c-2)	Plan D