Question
Dickinson Company has $12,140,000 million in assets. Currently half of these assets are financed with long-term debt at 10.7 percent and half with common stock
Dickinson Company has $12,140,000 million in assets. Currently half of these assets are financed with long-term debt at 10.7 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 10.7 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.
Under Plan D, a $3,035,000 million long-term bond would be sold at an interest rate of 12.7 percent and 379,375 shares of stock would be purchased in the market at $8 per share and retired.
Under Plan E, 379,375 shares of stock would be sold at $8 per share and the $3,035,000 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.)
Earnings per share for: Current Plan _____ Plan D ______ Plan E ______
b-1. Compute the earnings per share if return on assets fell to 5.35 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Earnings per share for: Current Plan ______ Plan D ______ Plan E ______
b-2. Which plan would be most favorable if return on assets fell to 5.35 percent? Consider the current plan and the two new plans.
Current Plan | |
Plan E | |
Plan D |
b-3. Compute the earnings per share if return on assets increased to 15.7 percent. (Round your answers to 2 decimal places.) Earnings per share for:
Current Plan ______ Plan D ________ Plan E ________
b-4. Which plan would be most favorable if return on assets increased to 15.7 percent? Consider the current plan and the two new plans.
Current Plan | |
Plan D | |
Plan E |
c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,035,000 million in debt will be used to retire stock in Plan D and $3,035,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.7 percent. (Round your answers to 2 decimal places.) Earnings per share for:
Current Plan ______ Plan D ________ Plan E ________
c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?
Current Plan | |
Plan D | |
Plan E |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started