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 Plan E$,375,000$ shares of stock would be sold at $$8$ per share and the $$3$ million in proceeds would be used to reduce long$-$term debt.

a$.$ Calculate the earnings per share for each of these plans. Assume the par value of shares is $$8.($Round the final answers to $2$ decimal places.$)$

EPS

Current $

Plan D $

Plan E $

b$-1.$ Calculate the EPS for the Current Plan, Plan D and Plan E if return on assets fell to $5$ percent. $($Negative answers should be indicated by a minus sign. Round the final answers to $2$ decimal places.$)$

EPS

Current $

Plan D $

Plan E $

b$-2.$ Which of the above plans is most favourable?

multiple choice $1$

Current Plan Incorrect

Plan D

Plan E

b$-3.$ Calculate the EPS for the Current Plan, Plan D and Plan E if return on assets increased to $15$ percent. $($Round the final answer to $2$ decimal places.$)$

EPS

Current $

Plan D $

Plan E $

b$-4.$ Which of the above plans is most favourable?

multiple choice $2$

Current Plan

Plan D Correct

Plan E

c$.$ Using the formula provided in the chapter, calculate the EBIT$/$EPS indifference point between Plan D and Plan E$.($Enter the answers in dollars not in millions.$)$

EBIT $

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 of new equity will be sold to retire debt in Plan E$.$ Also assume that return on assets is $10$ percent.

d$-1.$ Calculate the EPS for each plan. $($Round the final answer to $2$ decimal places.$)$

EPS

Current $

Plan D $

Plan E $

d$-2.$ Which plan is more attractive?

multiple choice $3$

Current Plan

Plan D

Plan E Correct

e$.$ Calculate the EBIT$/$EPS indifference point at the new share price. $($Enter the answers in dollars not in millions.$)$

EBIT $