Dickinson Company has $12,060,000 million in assets. Currently halt of these ass

Question

Dickinson Company has $12,060,000 million in assets. Currently halt of these assets are financed with long-term debt at 10.3 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 nberest and taxes of 10.3 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3,015,000 million long-term bond would be sold at an interest rate of 12.3 percent and 376,875 shares of stock would be purchased in the market at $8 per sh end retired. Under Plan E, 376,875 shares of stock would be sold at $8 per share and the $3,015,000 in proceeds would be used to reduce long-term debr .. How would each of these ated eamings per share? Consider the arret plan and the two new pars (Round your anwers to 2 decimal places) Current Plan Plan D Plan E Earnings per share b-1. Compute the eamings per share if retum on assets eill to 5.15 percent (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Current Plan Plan D Plan E Earmings per share b-2. Which plan would be most favorable if return on assets fell to 5.15 peroent? Consider the current plan and the two new plans Plan D Current Plan Plan E

Explanation / Answer

Return on asset = EBIT/ average asset

EBIT = .103 * 12,060,000 = $1242180

Interest = .123 * .5 * 1206000 = $741690

Stock price per share = stock price of all share /number of share

number of share = .5 * 12060000/8 = 753750

Earning before tax = EBT/(1 - t) = 1242180/.6 = $2070300

Plan D

number of share = -376875 + 753750 = 367875

interest expense will be increased by 12.3% of 3015000 = $370845

Plan E

number of share = 376875 + 753750 = 1130625

interest expense will be reduced by 12.3% of 3015000 = $370845

Ans a)

ans b1)

Ans b2) Plan E is most favorable because it is generating positive earning per share.

Ans b3)

Ans b4) Will select plan D because it is generating highest earning per share.

ans c) number if share increase and decrease in plan D and E = 3015000/12 = 251250

Ans c2) Plan E is most attractive.

Current plan Plan D Plan E EBIT $           1,242,180.00 $           1,242,180.00 $           1,242,180.00 Less Interest $    741,690.00 $ 1,112,535.00 $    370,845.00 EBT $    500,490.00 $    129,645.00 $    871,335.00 Less Taxes $    200,196.00 $      51,858.00 $    348,534.00 EAT $    300,294.00 $      77,787.00 $    522,801.00 Common Share 753750 367875 1130625 EPS 0.40 0.21 0.46

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