Question

Dickinson Company has $11,820,000 million in assets. Currently, half of these assets are financed with long-term debt at 9.1 percent and a half with the 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 9.1 percent. The tax rate is 40 percent. Tax-loss carryover provisions apply, so negative tax amounts are permissible.
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.)

Answer 1

Answer:

Current Plan Plan D Plan E

Earnings per share (EPS) 0.44 0.34 0.04

Explanation:

I-Current Plan :

Total assets $11,820,000 million

Total debt 50% $11,820,000

= $5,910,000 million

Total equity

= $5,910,000 million

Number of shares

5910000/8= 738750 million

Current Plan:

Return on asset before interest and tax is 9.1%

= 11820000*9.1%

=$1075620 million

Less Interest paid to debt holders 9.1%

=5910000*9.1%

= ($537810) million

Less Tax 40%

=(1075620-537810)*40%

= ($215124)million

Available Net Income to equity shareholder

$322686 million

EPS=322686/738750

= 0.44

II-Plan D

Total assets= $11,820,000 million

Total debt= (50% ×11,820,000)+2955000

= $8865000 million

Total equity

5910000 - (369375*8)

=5910000-2955000

= $2955000 million

Number of shares =

=2955000/8

=369375 million

Plan D :

Return on asset before interest in which tax is given as 9.1%

= 11820000*9.1%

=$1075620 million

Less Interest paid to debt holders 9.1% =5910000*9.1%

= ($537810) million

Less Interest paid to debt holders 11.1%

=295500*11.1%

= ($328005) million

Less Tax40%

=(1075620-537810-328005)*40%

($83922)million

Net Income available to equity shareholder $125883 million

EPS=

=125883/369375= 0.34

III Plan E :

Total assets= $11,820,000 million

Total debt

= 5910000-2955000

=$2955000 million

Total equity

= 5910000 + (369375*8)

=5910000+2955000

= $8865000 million

Number of shares =8865000/8

=1108125 million

Plan E :

Return on asset before interest and tax is given as 9.1%

= 11820000*9.1%

=$1075620 million

Less Interest paid to debt holders 9.1% =2955000*9.1%= ($268905) million

Less Tax 40%

=(1075620-268905)*40% ($322686)million

Net Income available to equity shareholder $484029 million

EPS

=484029/1108125= 0.04

Current Plan Plan D Plan E

Earnings per share (EPS) 0.44 0.34 0.04