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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