Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt
Question:
Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt at 10 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 percent. The tax rate is 45 percent.
Under Plan D, a $3 million long-term bond would be sold at an interest rate of 12 percent and 375,000 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 375,000 shares of stock would be sold at $8 per share and the $3,000,000 in proceeds would be used to reduce long-term debt.
Q:a. 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.)
Q: b-1. Compute the earnings per share if return on assets fell to 5.40 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) Q:2. Which plan would be most favorable if return on assets fell to 5.40 percent? Consider the current plan and the two new plans. Plan E Current Plan Plan D
Q:b-3. Compute the earnings per share if return on assets increased to 15.8 percent. (Round your answers to 2 decimal places.)
Q:b-4. Which plan would be most favorable if return on assets increased to 15.8 percent? Consider the current plan and the two new plans. Plan E Current Plan Plan D
Q:c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $3,040,000 million in debt will be used to retire stock in Plan D and $3,040,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 10.8 percent. (Round your answers to 2 decimal places.)
Q: c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive? Plan E Plan D Current Plan
Advanced Accounting
ISBN: 978-0133451863
12th edition
Authors: Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, Kenneth Smith