Question

Dickinson Company has $12,140,000 million in assets. Currently half of these assets are financed with long-term debt at 10.7 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 10.7 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable Under Plan D, a $3,035,000 million long-term bond would be sold at an interest rate of 12.7 percent and 379,375 shares of stock would be purchased in the market at $8 per share and retired Under Plan E, 379,375 shares of stock would be sold at $8 per share and the $3,035,000 in proceeds would be used to reduce long term debt. a. How would each of these plans affect eamings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) Plan E Current Plan Plan D 0.42$ Earnings per share$ 0.53$ 0.55 b-1. Compute the earnings per share if return on assets fell to 5.35 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Plan E Current Plan Plan D (0.63)/ S Earnings per share$ 0.18 b-2. Which plan would be most favorable if return on assets fell to 5.35 percent? Consider the current plan and the two new plans O Plan D O Plan E Current Plan b-3. Compute the earnings per share if return on assets increased to 15.7 percent. Round your answers to 2 decimal places.) Plan D Plan E Current Plan Earnings per share$ 1.05 $ 1.47 $ 0.88 b-4. Which plan would be most favorable if return on assets increased to 15.7 percent? Consider the current plan and the two new plans O Plan E Current Plan O Plan D c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,035,000 million in debt will be used to retire stock in Plan D and $3,035,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.7 percent. (Round your answers to 2 decimal places.) Plan D Current Plan Plan E Earnings per share$ 0.53$ 0.36S 0.57 c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive? Plan D O Current Plan Plan E

Answer 1

a	How would each of the plans affect the earnings per share ? Consider the current plan and two new plans
		Dickinson Company
		Income Statement
	Particulars	Current Plan	Plan D	Plan E
	EBIT-12140000*10.7%	1298980	1298980	1298980
	Less Interest -Old-12140000/2*10.7%	649490	649490	324745
	New-3035000*12.7%		385445
	EBT	649490	264045	974235
	Less Taxes -40%	259796	105618	389694
	EAT	389694	158427	584541
	Common Shares	758750	379375	1138125
	EPS	0.5136	0.4176	0.5136
	Calculation of Common Shares
	Existing	12140000/2
	Equity	6070000
	Par value of share	$8
	No of common shares	758,750
	Plan D	758750-379375
		379375
	Plan E	758750+379375
		1138125
b-1	Compute the EPS If the return to assets fells to 5.35 Percent
	Particulars	Current Plan	Plan D	Plan E
	EBIT-12140000*5.35%	649490	649490	649490
	Less Interest -Old-12140000/2*10.7%	649490	649490	324745
	New-3035000*12.7%		385445
	EBT	0	-385445	324745
	Less Taxes -40%	0	-154178	129898
	EAT	0	-231267	194847
	Common Shares	758750	379375	1138125
	EPS	0	-0.6096	0.1712
b-2	Which Plan would be most favorable if return on assets fell to 5.35%
	Plan E will be favorable
b-3	Compute the EPS if the return to assets rises to 15.7%
	Particulars	Current Plan	Plan D	Plan E
	EBIT-12140000*15.7%	1905980	1905980	1905980
	Less Interest -Old-12140000/2*10.7%	649490	649490	324745
	New-3035000*12.7%		385445
	EBT	1256490	871045	1581235
	Less Taxes -40%	502596	348418	632494
	EAT	753894	522627	948741
	Common Shares	758750	379375	1138125
	EPS	0.9936	1.3776	0.8336
b-4	which plan would be most favorable if return on assets rises to 15.7%
	Plan D
C-1	Dickinson Company
	Income Statement
	Particulars	Current Plan	Plan D	Plan E
	EBIT	1298980	1298980	1298980
	Less Interest -Old-12140000/2*10.7%	649490	649490	324745
	New-3035000*12.7%		385445
	EBIT	649490	264045	974235
	Less Taxes -40%	259796	105618	389694
	EAT	389694	158427	584541
	Common Shares	758750	455250	1062250
	EPS	0.5136	0.3480	0.5503
	Calculation of Common Shares
	Existing	12140000/2
	Equity	6070000
	Par value of share	$8
	No of common shares	758,750
	Plan D	758750-3035000/10
		455250
	Plan E	758750+3035000/10
		1062250
c-2	If the market price for common stock rose to $10 before restructuring which plan would be most attractive
	Plan E