Dickinson Company has $12 million in assets. Currently, half of these assets are financed with longterm debt at 10 percent, and half are financed with common stock. Ms. Smith, vicepresident 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

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

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

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

EBIT $