17. Dickinson Company has $11,820,000 million in assets. Currently half of these assets are financed with long-term debt at 9.1 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 earns a return on assets before interest and taxes of 9.1 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

Under Plan D, a $2,955,000 million long-term bond would be sold at an interest rate of 11.1 percent and 369,375 shares of stock would be purchased in the market at $8 per share and retired.

Under Plan E, 369,375 shares of stock would be sold at $8 per share and the $2,955,000 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 4.55 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Current Plan Plan D Plan E

Earnings per share ______ _______ _________

b-2. Which plan would be most favorable if return on assets fell to 4.55 percent? Consider the current plan and the two new plans.

• Plan D

• Current Plan

• Plan E

b-3. Compute the earnings per share if return on assets increased to 14.1 percent. (Round your answers to 2 decimal place)

Current Plan Plan D Plan E

Earnings per share ______ _______ _______

b-4. Which plan would be most favorable if return on assets increased to 14.1 percent? Consider the current plan and the two new plans.

• Plan D

• Current Plan

• Plan E

c-1. If the market price for common stock rose to $12 before the restructuring, compute the earnings per share. Continue to assume that $2,955,000 million in debt will be used to retire stock in Plan D and $2,955,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.1 percent. (Round your answers to 2 decimal places.)

Current Plan Plan D Plan E

Earnings per share ______ _______ _______

c-2. If the market price for common stock rose to $12 before the restructuring, which plan would then be most attractive?

• Plan E

• Current Plan

• Plan D