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(Answered) Corporate Finance


"Dickinson Company has $11,900,000 in assets. Currently half of these assets are financed with long-term debt at 9.5 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 9.5 percent. The tax rate is 40 percent. Under Plan D, a $2,975,000 long-term bond would be sold at an interest rate of 11.5 percent and 371,875 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 371,875 shares of stock would be sold at $8 per share and the $2,975,000 in proceeds would be used to reduce long-term debt. (a) Compute the earnings per share for the current plan and the two new plans. (Round your answers to 2 decimal places. Omit the ""$"" sign in your response.) Current Plan Plan D Plan E Earnings per share $ $ $ (b-1) Compute the earnings per share if return on assets fell to 4.75 percent. (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter ""0"" wherever required. Negative amounts should be indicated by a minus sign. Omit the ""$"" sign in your response.) Current Plan Plan D Plan E Earnings per share $ $ $ (b-2) Which plan would be most favorable if return on assets fell to 4.75 percent? Consider the current plan and the two new plans. Current Plan Plan D Plan E (b-3) Compute the earnings per share if return on assets increased to 14.5 percent. (Round your answers to 2 decimal places. Omit the ""$"" sign in your response.) Current Plan Plan D Plan E Earnings per share $ $ $ (b-4) Which plan would be most favorable if return on assets increased to 14.5 percent? Consider the current plan and the two new plans. Plan E Current Plan 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 $2,975,000 in debt will be used to retire stock in Plan D and $2,975,000 of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.5 percent. (Round your answers to 2 decimal places. Omit the ""$"" sign in your response.) Current Plan Plan D Plan E Earnings per share $ $ $ (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"
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Corporate Finance

 


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