Dickinson Company has $11,900,000 in assets. Currently half of these assets are

Question

Dickinson Company has $11,900,000 in assets. Currently half of these assets are financed with long-term debt at 9.5 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 9.5 percent. The tax rate is 40 percent.

     Under Plan D, a $2,975,000 long-term bond would be sold at an interest rate of 11.5 percent and 371,875 shares of stock would be purchased in the market at $8 per share and retired.

     Under Plan E, 371,875 shares of stock would be sold at $8 per share and the $2,975,000 in proceeds would be used to reduce long-term debt.

Compute the earnings per share for the current plan and the two new plans. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Compute the earnings per share if return on assets fell to 4.75 percent. (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.)

Which plan would be most favorable if return on assets fell to 4.75 percent? Consider the current plan and the two new plans.

Compute the earnings per share if return on assets increased to 14.5 percent. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Which plan would be most favorable if return on assets increased to 14.5 percent? Consider the current plan and the two new plans.

If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,975,000 in debt will be used to retire stock in Plan D and $2,975,000 of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.5 percent. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?

     Under Plan D, a $2,975,000 long-term bond would be sold at an interest rate of 11.5 percent and 371,875 shares of stock would be purchased in the market at $8 per share and retired.

Explanation / Answer

current plan :

EBIT = 11900000 * 9.5% = 1130500

interest = 5950000 * 9.5% = 565250

EBT = 1130500 - 565250 = 565250

taxes = EBT * 0.40 = 226100

EAT = 565250 - 226100 = 339150

common shares = 5950000 / 8 =743750

EPS = EAT/common shares = 339150/743750 = 0.456

plan D

EBIT = 11900000 * 9.5% = 1130500

interest = 5950000 * 9.5% + 2975000 * 11.5% = 907375

EBT = 1130500 - 907375 = 223125

taxes = EBT * 0.40 =89250

EAT = 223125 - 89250 = 133875

common shares = 371875

EPS = EAT/common shares = 133875/371875 = 0.36

plan E

EBIT = 11900000 * 9.5% = 1130500

interest = 5950000 - 2975000 * 9.5%= 282625

EBT = 1130500 -282625 = 847875

taxes = EBT * 0.40 = 339150

EAT = 847875 - 339150= 508725

common shares = 743750 + 371875 =1115625

EPS = EAT/common shares = 508725/1115625 = 0.456

B1) can be calculated as above except the EBIT changes and remaining can calculated as shown above......paln with best EPS is the best plan

b2)can be calculated as above except the EBIT changes and remaining can calculated as shown above

b3)can be calculated as above except the EBIT changes and remaining can calculated as shown above

b4) can be calculated as above except the EBIT changes and remaining can calculated as shown above......paln with best EPS is the best plan

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