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Dickinson Company has $11,940,000 million in assets. Currently half of these assets are financed with long-term debt at 9.7 percent and half with common stock
Dickinson Company has $11,940,000 million in assets. Currently half of these assets are financed with long-term debt at 9.7 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 9.7 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $2,985,000 million long-term bond would be sold at an interest rate of 11.7 percent and 373,125 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 373,125 shares of stock would be sold at $8 per share and the $2,985,000 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.) Plan E Current Plan Plan D Earnings per share b-1. Compute the earnings per share if return on assets fell to 4.85 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-3. Compute the earnings per share if return on assets increased to 14.7 percent. (Round your answers to 2 decimal places.) Current Plan Plan D Plan E Earnings per share
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