Dickinson Company has $11,940,000 million in assets. Cumently haif of these asse
ID: 2813613 • Letter: D
Question
Dickinson Company has $11,940,000 million in assets. Cumently haif of these assets are financed with long-berm debt at 9.7 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finanoe, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company eams a retur on assets before inerest and tanes of 9.7 peroent. The tax rate is 40 perontTa oss camyower provisions apply, so negative tax amounts are pemissable Un er P n D, as2.se5,000 milion long-term bond would be scldat an inerest rato of 11.percent and 373.125 shares of stock would be puroasad nthe market at saper share and introd Under Plan E, 373,125 shares of stock would be sold at $8 per share and the $2,985,000 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 PianPian D Pian E Eamings per share b4·Compute the oamings per share if rotun on assets foll to 485 peoenL (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places Current Pian Pian D Plan E Eaniny per share -2, which plan would be most favorablo-oham on assets fall to 4 85 perem? Consider the current plan w d the two, new plans. Cumant Plan Pian E b-3. Compute the eamings per shane if retum on assets inoressed to 14.7 percent. (Round your answers to 2 decimal places) Current Pian Pian D Plian t Earminga per shareExplanation / Answer
Current plan:
Total assets : $11,940,000 million
Debt = 50% of the asset = $ 11,940,000 *0.50 = $5,970,000
Interest expense =$5,970,000 * 9.7% = $5,79,090
Return on assets before interest and tax = 9.7%
Return before interest and tax = $11,940,000*9.7% = $11,58,180
Return before tax = 11,58,180 - 5,79,090 = 579090
Return after tax = 579090*(1-40%) = 347454
Total equity capital = 50% of total assets = 50% * 11940000 = 5970000
Par value = $8
Total number of outstanding shares = 5970000/8 = 746250
Earning per share = 347454 / 746250 = .4656
Plan D:
Interest expense = 2985000*11.7% = 349245
Total interest expense = 579090 + 349245 = 928335
earnings before tax = 1158180 - 928335 = 229845
earnings after tax = 229845 *(1-40%) = 137907
Number of shares purchased = 373125
Total number of shares = 746250 + 373125 = 1119375
Earnings per share = 137907/1119375 = .1232
Plan E:
Number of shares sold = 373125
Total number of outstanding shares = 746250 - 373125 = 373125
Long term debt reduced to =2985000
After reduction long term debt = 5970000 - 2985000 = 2985000
Interest expense = 2985000 *9.7% = 289545
Return before tax = 1158180 - 289545 = 868635
Earnings after tax = 868635 * (1-40%) = 521181
Earnings per share = 521181/373125 = 1.3968
Answer 2:
Return on assest fell to 4.85%
Return before interest and tax = 11940000*4.85% = 579090
Current Plan:
Earnings before tax = 579090 - 579090 = 0
Since earnings zero. earning per share will be = 0
Plan D:
Earnings before tax = 579090 - 928335 = -349245
Earnings per share = -349245 / 1119375 = -0.312
Plan E:
Earnings before tax =579090 - 289545 = 289545
Earnings per share = 289545/373125 =0.776
Answer 3:
If return on assets fell to 4.85%, the Plan E will be most favourable because earnings per share is positive, whereas earnings per share is zero and negative in other cases.
Answer 4:
If return on assets increased to 14.7%
Return before interest and tax = 11940000*14.7% = 1755180
Current Plan:
Interest expense = 579090
Earning before tax = 1755180 - 579090= 1176090
Earnings after tax =1176090 * (1-40%) = 705654
Earnings per share = 705654/746250 =0.9456
Plan D:
Interest expense =928335
Returns before tax = 1755180 - 928335 = 826845
Earnings after tax = 826845 * (1-40%) = 496107
Earnings per share = 496107/1119375 = .4432
Plan E:
Interest expense =289545
Returns before tax = 1755180 - 289545 = 1465635
Earnings after tax = 1465635 * (1-40%) = 879381
Earnings per share = 879381/373125 = 2.3568
Answer 5:
If return on assets increased to 14.7%, then Plan E is most favourable because earnings per share is higher in case of PLan E compare to current plan and Plan D.
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