Deebo's Squeaky Wheel Bicycles has $$37$ million in assets. Currently, half of these assets are

financed with long term debt at $7$ percent interest and half with common stock having a par

value of $$10.$ Craig, the VP of finance, wishes to analyze two refinancing plans. One with more

debt $($Plan D$)$ and one with more equity $($Plan E$).$ The company earns a return on assets before

interest and taxes of $10$ percent. The tax rate is $30$ percent.

Plan D: a $$9\mathrm{.}25$ million long$-$term bond would be sold at an interest rate of $16$ percent and

$925,000$ shares of stock would be purchased in the market at $$10$ per share and retired.

Plan E: $925,000$ shares of stock would be sold at $$10$ per share and the $$9\mathrm{.}25$ million in

proceeds would be used to reduce long term debt.

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

plans. Which plan would produce the highest EPS?

b$.$ Which plan would be most favorable if ROA increased to $20$ percent? Compare the

current and two different plans. What has caused the plans to give different EPS

numbers?

c$.$ Assuming ROA is back to the original $10$ percent, but the interest rate on new debt in

Plan D is only $11$ percent, which of the three plans will produce the highest EPS? Why?