Problem 5-23 Leverage and sensitivity analysis [LO5-6]

DickinsonCompanyhas $12,060,000 million in assets. Currently half of these assets are financed with long-term debtat 10.3 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 areturn on assetsbefore interest and taxes of 10.3 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

Under Plan D, a $3,015,000 million long-term bond would be sold at aninterest rateof 12.3 percent and 376,875shares of stockwould be purchased in the market at $8 per share and retired.

Under Plan E, 376,875 shares of stock would be sold at $8 per share and the $3,015,000 inproceedswould be used to reduce long-termdebt.

a.How would each of these plans affectearnings per share? Consider the current plan and the two new plans.(Round your answers to 2 decimal places.)