Problem $5-23($Static$)$ Leverage and sensitivity analysis $[$LO$5-6]$

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$.$ Park, 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. Tax loss carryover provisions apply, so negative tax amounts are permissable.

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.

a$.$ Compute earnings per share considering the current plan and the two new plans.

Note: Round your answers to $2$ decimal places.

Answer is complete and correct.

b$-4.$ Which plan would be most favorable if return on assets increased to $15$ percent? Consider the current plan and the two new plans.

Current Plan

Plan $E$

Plan D

c$-1.$ If the market price for common stock rose to $$12$ before the restructuring, compute the earnings per share. Continue to assume

that $$3$ million in debt will be used to retire stock in Plan $D$ and $$3$ million of new equity will be sold to retire debt in Plan E$.$ Also

assume that return on assets is $10$ percent.

Note: Round your answers to $2$ decimal places.

answer the wrong and unanswered table