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 750,000 shares of 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.

b-1.Calculate the EPS for each of theCurrent Planand Plan D and Plan E if return on assetsfell to 5 percent.(Negative answers should be indicated by a minus sign. Round the final answers to 2 decimal places.

Using the formula provided in the chapter, calculate the EBIT/EPS indifference point between Plan D and Plan E.

d.If the market price for common stock rose to $12 before the restructuring. 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.

d-1.Calculate the EPS for each plan

.Which plan is more attractive.