Dickinson Company has $12,080,000 million in assets. Currently half of these ass

Question

Dickinson Company has $12,080,000 million in assets. Currently half of these assets are financed with long-term debt at 10.4 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 10.4 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $3,020,000 million long-term bond would be sold at an interest rate of 12.4 percent and 377,500 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 377,500 shares of stock would be sold at $8 per share and the $3,020,000 in proceeds would be used to reduce long-term debt.

b-3. Compute the earnings per share if return on assets increased to 15.4 percent.

c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,020,000 million in debt will be used to retire stock in Plan D and $3,020,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.4 percent. (Round your answers to 2 decimal places.)

Explanation / Answer

a b1 ROA reduced to 5.2% b3 ROA increased to 15.4% c Stock price increased to 10$ Money Costs Money Costs Money Costs Money Costs A Assets 12080000 A Assets 12080000 A Assets 12080000 A Assets 12080000 B Debt 6040000 10.40% B Debt 6040000 10.40% B Debt 6040000 10.40% B Debt 6040000 10.40% C Equity 6040000 C Equity 6040000 C Equity 6040000 C Equity 6040000 D RoA 1256320 10.40% D RoA 628160 5.20% D RoA 1860320 15.40% D RoA 1256320 10.40% E Stock par value 8 E Stock par value 8 E Stock par value 8 E Stock par value 8 F Number of stocks 755000 F Number of stocks 755000 F Number of stocks 755000 F Number of stocks 755000 G Tax 40% G Tax 40% G Tax 40% G Tax 40% H PAT = (D-B*10.4%)*(1-G) 376896 H PAT = (D-B*10.4%)*(1-G) 0 H PAT = (D-B*10.4%)*(1-G) 739296 H PAT = (D-B*10.4%)*(1-G) 376896 EPS (H/F) 0.4992 EPS (H/F) 0 EPS (H/F) 0.9792 EPS (H/F) 0.4992 Plan D Plan D Plan D Plan D I new debt 3020000 12.40% I new debt 3020000 12.40% I new debt 3020000 12.40% I new debt 3020000 12.40% J Equity purchase 3020000 J Equity purchase 3020000 J Equity purchase 3020000 J Equity purchase 3020000 K New shares outstanding (F-J/8) 377500 8 K New shares outstanding 377500 8 K New shares outstanding 377500 8 K New shares outstanding 453000 10 L New interest (B*10.4%+I*12.4%) 1002640 L New interest (B*10.4%+I*12.4%) 1002640 L New interest (B*10.4%+I*12.4%) 1002640 L New interest (B*10.4%+I*12.4%) 1002640 M New earning/PAT (D-L)*(1-G) 152208 M New earning/PAT (D-L)*(1-G) -224688 M New earning/PAT (D-L)*(1-G) 514608 M New earning/PAT (D-L)*(1-G) 152208 N EPS 0.4032 N EPS -0.5952 N EPS 1.3632 N EPS 0.336 Plan E Plan E Plan E Plan E O Debt retire 3020000 O Debt retire 3020000 O Debt retire 3020000 O Debt retire 3020000 P Equity issue 3020000 8$ P Equity issue 3020000 8$ P Equity issue 3020000 8$ P Equity issue 3020000 8$ Q New outstanding shares (F+P/8) 1132500 Q New outstanding shares 1132500 Q New outstanding shares 1132500 Q New outstanding shares F+P/10 1057000 R New interest (O*10.4%) 314080 R New interest (O*10.4%) 314080 R New interest (O*10.4%) 314080 R New interest (O*10.4%) 314080 S New earning/PAT = (D-R)*(1-G) 565344 S New earning/PAT = (D-R)*(1-G) 188448 S New earning/PAT = (D-R)*(1-G) 927744 S New earning/PAT = (D-R)*(1-G) 565344 T EPS = S/Q 0.4992 T EPS = S/Q 0.1664 T EPS = S/Q 0.8192 T EPS = S/Q 0.534857 Current Plan Plan D Plan E Current Plan Plan D Plan E Current Plan Plan D Plan E Current Plan Plan D Plan E EPS 0.4992 0.4032 0.4992 EPS 0 -0.5952 0.1664 EPS 0.9792 1.3632 0.8192 EPS 0.4992 0.336 0.534857

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