Dickinson Company has $12,120,000 million in assets. Currently half of these ass
ID: 2813226 • Letter: D
Question
Dickinson Company has $12,120,000 million in assets. Currently half of these assets are financed with long-term debt at 10.6 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 10.6 percent. The tax rate is 45 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.
Under Plan D, a $3,030,000 million long-term bond would be sold at an interest rate of 12.6 percent and 378,750 shares of stock would be purchased in the market at $8 per share and retired.
Under Plan E, 378,750 shares of stock would be sold at $8 per share and the $3,030,000 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.)
Current Plan, Plan D, Plan E
Earnings per share _____, ______, _____.
b-1. Compute the earnings per share if return on assets fell to 5.30 percent. (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 5.30 percent? Consider the current plan and the two new plans.
b-3. Compute the earnings per share if return on assets increased to 15.6 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 15.6 percent? Consider the current plan and the two new plans.
c-1. If the market price for common stock rose to $12 before the restructuring, compute the earnings per share. Continue to assume that $3,030,000 million in debt will be used to retire stock in Plan D and $3,030,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.6 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?
Explanation / Answer
A) So, in the above table if you see for Part 1 which is the first question we see that in current plan EPS is 0.47, under Plan D it is 0.38 and under Plan E it is again 0.47.
B-1) Under Part B-1 column if you see the earning per share as per current plan is 0, under Plan D it is (0.55) and under Plan E it is 0.16.
B-2) As we we can see in B-1 Plan E is the only plan with positive EPS.
B-3) Under Part B-3 column in above table if you see the EPS as per current plan is 0.91, under Plan D it is 1.26 and under Plan E it is 0.76.
B-4) We can see the Plan D is having the highest EPS in Part B-3 and hence this is the most favourable plan.
C-1) EPS is calculated on the book value of shares and not on the market value of shares, so even though the market price increased from 8 to 12, the EPS will be same as in Part A.
C-2) In Part A we can see that EPS as per current plan is 0.47, as per Plan D it is 0.38 and as per Plan E it is 0.47 so both Current Plan and Plan E is equally favourable.
Part A Part B-1 Part B-3 Current Plan Current Plan Current Plan Total Asset of Company 12,120,000 12,120,000 12,120,000 10.6% Long Term Debt 6,060,000 6,060,000 6,060,000 Equity 6,060,000 6,060,000 6,060,000 Par Value 8 8 8 No. of Share 757,500 757,500 757,500 Earnings before interest and taxes 10.60% 1,284,720 5.30% 642,360 15.60% 1,890,720 Interest on long term debt 642,360 642,360 642,360 Earnings before taxes 642,360 - 1,248,360 Taxes 45% 289,062 45% - 45% 561,762 Profit after tax attributable to Equity shareholders 353,298 - 686,598 Earnings per share 0.47 - 0.91 Plan D Plan D Plan D Total Asset of Company 12,120,000 12,120,000 12,120,000 10.6% Long Term Debt 6,060,000 6,060,000 6,060,000 12.6 Long Term Debt 3,030,000 3,030,000 3,030,000 Equity before repurchase 6,060,000 6,060,000 6,060,000 Par Value 8 8 8 No. of Share before repurchase 757,500 757,500 757,500 No. shares repurchases 378,750 378,750 378,750 Revised no. of shares 378,750 378,750 378,750 Earnings before interest and taxes 10.60% 1,284,720 5.30% 642,360 15.60% 1,890,720 Interest on long term debt 1,024,140 1,024,140 1,024,140 Earnings before taxes 260,580 (381,780) 866,580 Taxes 45% 117,261 45% (171,801) 45% 389,961 Profit after tax attributable to Equity shareholders 143,319 (209,979) 476,619 Earnings per share 0.38 (0.55) 1.26 Plan E Plan E Plan E Total Asset of Company 12,120,000 12,120,000 12,120,000 10.6% Long Term Debt before reduction of debt 6,060,000 6,060,000 6,060,000 10.6% Long Term Debt after reduction of debt 3,030,000 3,030,000 3,030,000 Equity before issue of additonal shares 6,060,000 6,060,000 6,060,000 Par Value 8 8 8 No. of Share before issue of additonal shares 757,500 757,500 757,500 No. of shares issued 378,750 378,750 378,750 Revised No. of shares 1,136,250 1,136,250 1,136,250 Earnings before interest and taxes 10.60% 1,284,720 5.30% 642,360 15.60% 1,890,720 Interest on long term debt 321,180 321,180 321,180 Earnings before taxes 963,540 321,180 1,569,540 Taxes 45% 433,593 45% 144,531 45% 706,293 Profit after tax attributable to Equity shareholders 529,947 176,649 863,247 Earnings per share 0.47 0.16 0.76Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.