Dickinson Company has $11,980,000 million in assets. Currently half of these assets are financed with long-term debt at 9.9 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 9.9 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $2,995,000 million long-term bond would be sold at an interest rate of 11.9 percent and 374,375 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 374,375 shares of stock would be sold at $8 per share and the $2,995,000 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. Earnings per share S Answer is complete and correct. Current Plan 0.48 S Plan D 0.38 $ Plan E 0.48
Dickinson Company has $11,980,000 million in assets. Currently half of these assets are financed with long-term debt at 9.9 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 9.9 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $2,995,000 million long-term bond would be sold at an interest rate of 11.9 percent and 374,375 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 374,375 shares of stock would be sold at $8 per share and the $2,995,000 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. Earnings per share S Answer is complete and correct. Current Plan 0.48 S Plan D 0.38 $ Plan E 0.48
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Dickinson Company has $11,980,000 million in assets. Currently half of these assets are financed with long-term debt at 9.9 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 9.9 percent.
The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.
Under Plan D, a $2,995,000 million long-term bond would be sold at an Interest rate of 11.9 percent and 374,375 shares of stock would
be purchased in the market at $8 per share and retired.
Under Plan E, 374,375 shares of stock would be sold at $8 per share and the $2,995,000 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.
Earnings per share
Earnings per share
O Plan D
O Plan E
O Current Plan
Earnings per share
✓ Answer is complete and correct.
Current
Plan
b-1. Compute the earnings per share if return on assets fell to 4.95 percent.
Note: Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. Leave no cells blank be
certain to enter O wherever required.
S
O Plan D
O Current Plan
O Plan E
0.48 S
Earnings per share
Current Plan
b-2. Which plan would be most favorable if return on assets fell to 4.95 percent? Consider the current plan and the two new plans.
Plan D
O Plan E
O Current Plan
Plan D
0.38 S
b-3. Compute the earnings per share if return on assets Increased to 14.9 percent.
Note: Round your answers to 2 decimal places.
Current Plan
Plan D
Plan E
Current Plan
0.48✔
Plan D
b-4. Which plan would be most favorable if return on assets Increased to 14.9 percent? Consider the current plan and the two new
plans.
Plan E
c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume
that $2,995,000 million in debt will be used to retire stock In Plan D and $2,995,000 million of new equity will be sold to retire debt in
Plan E. Also assume that return on assets is 9.9 percent.
Note: Round your answers to 2 decimal places.
Plan D
Plan E
Plan E
c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?
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