Analyze two refinancing plans-one with more debt and equity

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Edsel Research Labs has $27 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the 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 5 percent. The tax rate is 30 percent.

Under Plan D, a $6.75 million long-term bond would be sold at an interest rate of 11 percent and 675,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 675,000 shares of stock would be sold at $10 per share and the $6,750,000 in proceeds would be used to reduce long-term debt.

a-1. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Current____

Plan A____

Plan B_____

Reference no: EM131842385

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