Reference no: EM132472694
Point 1: Dickinson Company has $12,040,000 million in assets. Currently half of these assets are financed with long-term debt at 10.2 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 10.2 percent. The tax rate is 35 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.
Point 2: Under Plan D, a $3,010,000 million long-term bond would be sold at an interest rate of 12.2 percent and 376,250 shares of stock would be purchased in the market at $8 per share and retired.
Point 3: Under Plan E, 376,250 shares of stock would be sold at $8 per share and the $3,010,000 in proceeds would be used to reduce long-term debt.
Question 1: 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.)
Question 2: Compute the earnings per share if return on assets fell to 5.10 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)
Question 3: Which plan would be most favorable if return on assets fell to 5.10 percent? Consider the current plan and the two new plans.
- Plan D
- Plan E
- Current Plan
Question 4: Compute the earnings per share if return on assets increased to 15.2 percent. (Round your answers to 2 decimal places.)
Question 5: Which plan would be most favorable if return on assets increased to 15.2 percent? Consider the current plan and the two new plans.
- Current Plan
- Plan E
- Plan D
Question 6: If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,010,000 million in debt will be used to retire stock in Plan D and $3,010,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.2 percent. (Round your answers to 2 decimal places.)
Question 7: If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?
- Current Plan
- Plan E
- Plan D
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