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Dickinson Company has $11,940,000 million in assets. Currently half of these assets are financed with long-term debt at 9.7 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 9.7 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

 

     Under Plan D, a $2,985,000 million long-term bond would be sold at an interest rate of 11.7 percent and 373,125 shares of stock would be purchased in the market at $8 per share and retired.

 

     Under Plan E, 373,125 shares of stock would be sold at $8 per share and the $2,985,000 in proceedswould 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.)

 

Current Plan Plan D Plan E
  Earnings per share $ $ $

 

b-1. Compute the earnings per share if return on assets fell to 4.85 percent. (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

 

   Current Plan Plan D Plan E
  Earnings per share $ $ $

 

b-2. Which plan would be most favorable if return on assets fell to 4.85 percent? Consider the current plan and the two new plans.
Plan E
Plan D
Current Plan

 

b-3. Compute the earnings per share if return on assets increased to 14.7 percent. (Round your answers to 2 decimal places.)

 

Current Plan Plan D Plan E
  Earnings per share $ $ $

 

b-4. Which plan would be most favorable if return on assets increased to 14.7 percent? Consider the current plan and the two new plans.
Plan E
Current Plan
Plan D

 

c-1. If the market price for common stock rose to $12 before the restructuring, compute the earnings per share. Continue to assume that $2,985,000 million in debt will be used to retire stock in Plan D and $2,985,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.7 percent. (Round your answers to 2 decimal places.)

 

Current Plan Plan D Plan E
  Earnings per share $ $ $

 

c-2. If the market price for common stock rose to $12 before the restructuring, which plan would then be most attractive?
Plan E
Current Plan
Plan D

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