Return Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here. Lenow Debt 90 Common stock, $10 par Total common shares Hall $130,000 Debt 98 260,000 Common stock, $10 par $390,000 Total 26,000 Common shares $260.000 130,000 $390,000 13,000 a. Complete the following table given earnings before interest and taxes of $17,000, $35,000, and $58,000. Assume the tax rate is 20 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.) EBIT EBITITA % Answer is not complete. What is the relationship between Lenow Hall EPS EPS the EPS of the two firms? $ 4.36 0.20 Lenow EPS > Hal EPS $ 0.88 $ 0.88 1.75 2.613 % Total Assets $ 390,000 $ 390,000 $ 390,000 $ 17,000 $ 35,100 $ 55,000 9.00 14.87% b-1. What is the EBIT/TA rate when the firm's have equal EPS? Answer is complete and correct. EBITITA rate % b-2. What is the cost of debt? Dickinson Company has $12,020,000 million in assets. Currently half of these assets are financed with long-term debt at 10.1 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 10.1 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3,005,000 million long-term bond would be sold at an interest rate of 12.1 percent and 375,625 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 375,625 shares of stock would be sold at $8 per share and the $3,005,000 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 Current Plan $ 0.487 s Plan D 0.39 s Plan E 0.48 b.1. Compute the earnings per share if return on assets fell to 5.05 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Plan E Current Plan Plan D $ () $ 0.16 Earnings per share b-2. Which plan would be most favorable if return on assets fell to 5.05 percent? Consider the current plan and the two new plans. runt Dian b-2. Which plan would be most favorable if return on assets fell to 5.05 percent? Consider the current plan and the two new plans. O Current Plan Plan E O Plan D b-3. Compute the earnings per share if return on assets increased to 15.1 percent. (Round your answers to 2 decimal places.) Current Plan $ 0.96 Plan D Plan E 1.35s 0.80 Earnings per share $ b-4. Which plan would be most favorable if return on assets increased to 15.1 percent? Consider the current plan and the two new plans. Plan D O Current Plan O 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 $3,005,000 million in debt will be used to retire stock in Plan D and $3,005,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.1 percent. (Round your answers to 2 decimal places.) Current Plan $ 0.485 Plan D 0.32 $ Plan E 0.52 Earnings per share 19 b-4. Which plan would be most favorable if return on assets increased to 15.1 percent? Consider the current plan and the two new plans. Plan D O Current Plan O 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 $3,005,000 million in debt will be used to retire stock in Plan D and $3,005,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.1 percent. (Round your answers to 2 decimal places.) Current Plan $ 0.48s Plan D Plan E 0.327 s Earnings per share 0.52 c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive? Plan D O Current Plan Pian E
