Edsel Research Labs has $28.20 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the 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 5 percent. The tax rate is 30 percent. Under Plan D, a $7.05 million long-term bond would be sold at an interest rate of 7 percent and 705,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 705,000 shares of stock would be sold at $10 per share and the $7,050,000 in proceeds would be used to reduce long-term debt. a-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.) Earnings per Share Current Plan D Plan E a-2. Which plan(s) would produce the highest EPS? Note that due to tax loss carry-forwards and carry-backs, taxes can be a negative number. multiple choice The Current Plan and Plan E Plan D Plan E Current Plan b. Which plan would be most favorable if return on assets increased to 8 percent? Compare the current plan and the two new plans. multiple choice Current Plan Plan D Plan E Current Plan and Plan D c. Assuming return on assets is back to the original 5 percent, but the interest rate on new debt in Plan D is 4 percent, which of the three plans will produce the highest EPS? multiple choice Plan D The plans Current and E Plan E The Plan Current and D
Edsel Research Labs has $28.20 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the 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
Under Plan D, a $7.05 million long-term bond would be sold at an interest rate of 7 percent and 705,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 705,000 shares of stock would be sold at $10 per share and the $7,050,000 in proceeds would be used to reduce long-term debt.
a-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.)
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a-2. Which plan(s) would produce the highest EPS? Note that due to tax loss carry-forwards and carry-backs, taxes can be a negative number.
multiple choice
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The Current Plan and Plan E
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Plan D
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Plan E
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Current Plan
b. Which plan would be most favorable if return on assets increased to 8 percent? Compare the current plan and the two new plans.
multiple choice
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Current Plan
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Plan D
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Plan E
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Current Plan and Plan D
c. Assuming return on assets is back to the original 5 percent, but the interest rate on new debt in Plan D is 4 percent, which of the three plans will produce the highest EPS?
multiple choice
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Plan D
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The plans Current and E
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Plan E
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The Plan Current and D
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