Dickinson Company has $12 million in assets. Currently, half of these assets are financed with long-term debt at 10 percent, and half are financed with common stock. 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 10 percent. The tax rate is 45 percent. Under Plan D, a $3 million long-term bond would be sold at an interest rate of 12 percent and 375,000 shares of stock would be purchased in the market at $8 per share and retired. Under PlanE, 375,000 shares of stock would be sold at $8 per share and the $3 million in proceeds would be used to reduce long-term debt. Show all calculations to support your answers.

a. How would each of these plans affect EPS? Consider the current plan and the two new plans.

b. Which plan would be most favourable if return on assets fell to 5 percent? Increased to 15 percent? Consider the current plan and the two new plans.

c. Calculate the EBIT /EPS indifference point with the formula in the chapter.

d. If the market price for common stock rose to $12 before the restructuring, which plan would then be most attractive? Continue to assume that $3 million in debt will be used to retire stock in Plan D and $3 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10 percent.

e. Calculate the EBIT /EPS indifference point at the new share price.