Dickinson Company has $12,140,000 million in assets. Currently half of these ass

Question

Dickinson Company has $12,140,000 million in assets. Currently half of these assets are financed with long-term debt at 10.7 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 10.7 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

Under Plan D, a $3,035,000 million long-term bond would be sold at an interest rate of 12.7 percent and 379,375 shares of stock would be purchased in the market at $8 per share and retired.

Under Plan E, 379,375 shares of stock would be sold at $8 per share and the $3,035,000 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.)

Earnings per share for:
Current Plan _____
Plan D ______
Plan E ______

b-1. Compute the earnings per share if return on assets fell to 5.35 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Earnings per share for:
Current Plan ______
Plan D ______
Plan E ______

b-2. Which plan would be most favorable if return on assets fell to 5.35 percent? Consider the current plan and the two new plans.

b-3. Compute the earnings per share if return on assets increased to 15.7 percent. (Round your answers to 2 decimal places.)
Earnings per share for:

Current Plan ______
Plan D ________
Plan E ________

       
b-4. Which plan would be most favorable if return on assets increased to 15.7 percent? Consider the current plan and the two new plans.

c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,035,000 million in debt will be used to retire stock in Plan D and $3,035,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.7 percent. (Round your answers to 2 decimal places.)

Earnings per share for:

Current Plan ______
Plan D ________
Plan E ________

c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?

Explanation / Answer

Assets 12140000 Value Interest rate Debt = 6070000 10.70% Value Price No. Stock= 6070000 8 6070000/8 = 758750 Tax 40% Plan D = Increase in debt= 3035000 Debt = 6070000 + 3035000 9105000 Interest rate = 12.70% Stock = 758750 - 379375 = 379375 3035000 No. of shares to be bought back= 379375 Total assets 12140000 Buy back price= 8 Plan E= Increase in stock= 379375 Debt = 6070000 - 3035000 3035000 Price 8 Stock = 758750 + 379375 = 1138125 9105000 Reduction iin debt= 3035000 Total assets 12140000 a. D E EBIT = 12140000 x 10.7% = 1298980 1298980 Less : Interest = - New 3035000 x 12.7%= 385445 - Existing 6070000 x 10.7% 649490 649490 + Reduction in intererst 3035000 x 12.7%= 385445 EBT = 264045 1034935 Less: Tax @ 40% 105618 413974 PAT 158427 620961 No of shares 379375 1138125 EPS = 0.4176 0.5456 b. D E 1) EBIT = 12140000 x 5.35% = 649490 649490 Less : Interest = - New 3035000 x 12.7%= 385445 - Existing 6070000 x 10.7% 649490 649490 + Reduction in intererst 3035000 x 12.7%= 385445 EBT = -385445 385445 Less: Tax @ 40% -154178 154178 PAT -231267 231267 No of shares 379375 1138125 EPS = -0.6096 0.2032 b. 2) Plan E is better as it will provide positive PAT b. D E 3) EBIT = 12140000 x 15.7% = 1905980 1905980 Less : Interest = New 3035000 x 12.7%= 385445 Existing 6070000 x 10.7% 649490 649490 Reduction in intererst 3035000 x 12.7%= 385445 EBT = 871045 1641935 Less: Tax @ 40% 348418 656774 PAT 522627 985161 No of shares 379375 1138125 EPS = 1.3776 0.8656 b. 4) Plan D is better as it will provide higher PAT c. No of shares to be redeemed or raised = 3035000/10 1) 303500 Plan D Debt = 6070000 + 3035000 9105000 Stock = 758750 - 303500 = 455250 3035000 Total assets 12140000 Plan E Debt = 6070000 - 3035000 3035000 Stock = 758750 + 303500 = 1062250 9105000 Total assets 12140000 D E EBIT = 12140000 x 10.7% = 1298980 1298980 Less : Interest = New 3035000 x 12.7%= 385445 Existing 6070000 x 10.7% 649490 649490 Reduction in intererst 3035000 x 12.7%= 0 385445 EBT = 264045 1034935 Less: Tax @ 40% 105618 413974 PAT 158427 620961 No of shares 455250 1062250 EPS = 0.348 0.584571 2 Plan E is better as it will provide higher EPS Please provide feedback…. Thanks in advance…. :-)

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