Edsel Research Labs has $26.00 million in assets. Currently half of these assets are financed with long-term
Question:
Edsel Research Labs has $26.00 million in assets. Currently half of these assets are financed with long-term debt at 6 percent and half with common stock having a par value of $10. Ms. Edsel, the 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 6 percent. The tax rate is 35 percent.
Under Plan D, a $6.50 million long-term bond would be sold at an interest rate of 9 percent and 650,000 shares of stock would be purchased in the market at $10 per share and retired.Under Plan E, 650,000 shares of stock would be sold at $10 per share and the $6,500,000 in proceeds would be used to reduce long-term debt.
a-1.How would each of these plans affect earnings per share? Consider the current plan and the two new plans.(Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Earnings Per Share:
Current Plan -
Plan D -
Plan E -
a-2.Which plan(s) would produce the highest EPS? Note that due to tax loss carry-forwards and carry-backs, taxes can be a negative number.
- Plan E
- Plan D
- The Current Plan and Plan E
b.Which plan would be most favorable if return on assets increased to 8 percent? Compare the current plan and the two new plans.
- Current Plan
- Plan D
- Plan E
c.Assuming return on assets is back to the original 6 percent, but the interest rate on new debt in Plan D is 4 percent, which of the three plans will produce the highest EPS?
- Plan D
- The plans Current and E
- Plan E
- The Plan Current and D