70.2K

Verified Solution

Link Copied!

Dickinson Company has $12,100,000 million in assets. Currently half of these assets are financed with long-term debt at 10.5 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 10.5 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

Under Plan D, a $3,025,000 million long-term bond would be sold at an interest rate of 12.5 percent and 378,125 shares of stock would be purchased in the market at $8 per share and retired.

Under Plan E, 378,125 shares of stock would be sold at $8 per share and the $3,025,000 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 5.25 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 5.25 percent? Consider the current plan and the two new plans.

multiple choice 1

Current Plan

Plan D

Plan E

b-3. Compute the earnings per share if return on assets increased to 15.5 percent. (Round your answers to 2 decimal places.)

b-4. Which plan would be most favorable if return on assets increased to 15.5 percent? Consider the current plan and the two new plans.

multiple choice 2

Current Plan

Plan E

Plan D

c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,025,000 million in debt will be used to retire stock in Plan D and $3,025,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.5 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?

multiple choice 3

Plan D

Plan E

Current Plan

Answer & Explanation Solved by verified expert

See Answer