Dickinson Company has $14.3 million in assets. Currently half of these assets ar

Question

Dickinson Company has $14.3 million in assets. Currently half of these assets are financed with long-term debt at 12 percent and half with common stock having a par value of $10. 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 12 percent. The tax rate is 40 percent.

Under Plan D, a $3.575 million long-term bond would be sold at an interest rate of 11 percent and 357,500 shares of stock would be purchased in the market at $10 per share and retired.


Under Plan E, 357,500 shares of stock would be sold at $10 per share and the $3,575,000 in proceeds would be used to reduce long-term debt.

(a)
Compute the earnings per share for the current plan and the two new plans. (Enter your answers in dollars not in millions. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

Current Plan Plan D Plan E
Earnings per share $ .72 $ .78 $ .72

(b-1)
Compute the earnings per share if return on assets fell to 10 percent. (Enter your answers in dollars not in millions. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

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



(b-2)
Compute the earnings per share if return on assets increased to 17 percent. (Enter your answers in dollars not in millions. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

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



(c-1)
If the market price for common stock rose to $14 before the restructuring, compute the earnings per share. Continue to assume that $3.575 million in debt will be used to retire stock in Plan D and $3.575 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10 percent. (Enter your answers in dollars not in millions. Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

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

Explanation / Answer

Baxter International-BAX and Onconova Therapeutics, Inc.announced that they have entered into a European licensing agreement for rigosertib, a novel targeted anti-cancer compound currently in a Phase III study for the treatment of a group of rare hematologic malignancies called Myelodysplastic Syndromes (MDS) and in a Phase II/III study for pancreatic cancer. Under the terms of the agreement, Baxter will obtain commercialization rights in the European Union and other countries in Europe. Baxter will make an upfront payment of $50 million to Onconova, which will be recorded as a special pre-tax in-process research and development charge in the third quarter of 2012. In addition, Onconova may receive up to $515 million in pre-commercial development and regulatory milestones for the MDS and pancreatic cancer indications, in addition to sales milestones and royalties. Baxter has the option to participate in the development and commercialization of rigosertib in additional indications. Baxter has an existing equity investment with Onconova of $50 million. 3M-MMM is working to address objections by the U.S. Department of Justice over the company’s planned $550 million acquisition of Avery-Dennison. 3M’s Chief Executive, Inge Thulin, said the company plans to do "maybe fewer, but slightly bigger" acquisitions than it has in the past. Thulin added that the company's long-term goal for organic revenue growth at 7 percent to 8 percent annually was set at a time of stronger global economic growth but remained an achievable "stretch target."

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