Dickinson Company has $11,880,000 million in assets. Currently half of these assets are financed with long-term debt at 9.4 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 9.4 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable. Under Plan D, a $2,970,000 million long-term bond would be sold at an interest rate of 11.4 percent and 371,250 shares of stock would be purchased in the market at $8 per share and retired. Under Plan E, 371,250 shares of stock would be sold at $8 per share and the $2,970,000 in proceeds would be used to reduce long-term debt.
Required:
a. How would each of these plans affect earnings per share?
b. Compute the earnings per share if return on assets fell to 4.70 percent.
c. Which plan would be most favorable if return on assets fell to 4.70 percent?
