Question
Dickinson Company has $12,100,000 million in assets. Currently half of these assets are financed with long-term debt at 10.5 percent and half with common stock
Dickinson Company has $12,100,000 million in assets. Currently half of these assets are financed with long-term debt at 10.5 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 10.5 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3,025,000 million long-term bond would be sold at an interest rate of 12.5 percent and 378,125 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 378,125 shares of stock would be sold at $8 per share and the $3,025,000 in proceeds would be used to reduce long-term debt. Compute the earnings per share if return on assets increased to 15.5 percen If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,025,000 million in debt will be used to retire stock in Plan D and $3,025,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.5 percent If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?
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