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Dickinson Company has $12,020,000 million in assets. Currently half of these assets are financed with...

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Finance

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.

Compute the earnings per share if return on assets increased to 15.1 percent.

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.

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