Question

Dickinson Company has $11,980,000 million in assets. Currently half of these assets are financed with long-term

debt at 9.9 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 9.9 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

Under Plan D, a $2,995,000 million long-term bond would be sold at an interest rate of 11.9 percent and 374,375 shares of stock would be purchased in the market at $8 per share and retired.

 Under Plan E, 374,375 shares of stock would be sold at $8 per share and the $2,995,000 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.)

b-1. Compute the earnings per share if return on assets fell to 4.95 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

b-2. Which plan would be most favorable if return on assets fell to 4.95 percent? Consider the current plan and the two new plans.

b-3. Compute the earnings per share if return on assets increased to 14.9 percent. (Round your answers to 2 decimal places.)

b-4. Which plan would be most favorable if return on assets increased to 14.9 percent? Consider the current plan and the two new plans.

c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,995,000 million in debt will be used to retire stock in Plan D and $2,995,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.9 percent. (Round your answers to 2 decimal places.)

c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?

 

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Question

International Data Systems information on revenue and cost is relevant only up to sales cost of 123,000 units.

After 123,000 units the market becomes saturated and the price per unit falls from $14.00 to $8.80 Also there are cost overruns at a production volume of over 123,000 units and variable cost per unit has goes up from $7 to $7

.50 Fixed cost remains the same at 73,000

A-Compute Operating Income at 123,000 units?

B-Compute Operating Income at 223,000

 

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