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Dickinson Company has

$

11,800,000 in assets. Currently half of these assets are financed with long-term debt at 9.0 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 9.0 percent. The tax rate is 35 percent.

     Under

Plan D

, a $2,950,000 long-term bond would be sold at an interest rate of 11.0 percent and 368,750 shares of stock would be purchased in the market at $8 per share and retired.

     Under

Plan E

, 368,750 shares of stock would be sold at $8 per share and the $2,950,000 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

Earnings per share

$   

(b-1)

Compute the earnings per share if return on assets fell to 4.50 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.)

(b-2)

Which plan would be most favorable if return on assets fell to 4.50 percent? Consider the current plan and the two new plans.

Plan E

Current Plan

Plan D

(b-3)

Compute the earnings per share if return on assets increased to 14.0 percent. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

(b-4)

Which plan would be most favorable if return on assets increased to 14.0 percent? Consider the current plan and the two new plans.

(c-1)

If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,950,000 in debt will be used to retire stock in Plan D and $2,950,000 of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.0 percent. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

(c-2)

If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

  Sales

5,600,000  

    Less: Variable expense (50% of sales)

2,800,000  

             Fixed expense

1,860,000  

  Earnings before interest and taxes (EBIT)

940,000  

  Interest (10% cost)

320,000  

  Earnings before taxes (EBT)

620,000  

  Tax (30%)

186,000  

  Earnings after taxes (EAT)

434,000  

  Shares of common stock

260,000  

1.67  

    The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $2.6 million in additional financing. His investment banker has laid out three plans for him to consider:

1.Sell $2.6 million of debt at 14 percent.

2.Sell $2.6 million of common stock at $20 per share.

3.Sell $1.30 million of debt at 13 percent and $1.30 million of common stock at $25 per share.

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,360,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $1.30 million per year for the next five years.
    Delsing is interested in a thorough analysis of his expansion plans and methods of financing.

(a)

The break-even point for operating expenses before and after expansion. (Enter your answers in dollars not in millions. Omit the “$” sign in your response.)

Break-even point

  Before expansion

 $   

  After expansion

(b)

The degree of operating leverage before and after expansion. Assume sales of $5.6 million before expansion and $6.6 million after expansion. (Enter only numeric values rounded to 2 decimal places.)

   Degree of
operating leverage

The degree of financial leverage before expansion. (Enter only numeric value rounded to 2 decimal places.)

  Degree of financial leverage

The degree of financial leverage for all three methods after expansion. Assume sales of $6.6 million for this question. (Round your answers to 2 decimal places.)

Degree of
financial leverage

  100% Debt

  100% Equity

  50% Debt & 50% Equity

(d)

Compute EPS under all three methods of financing the expansion at $6.6 million in sales (first year) and $10.6 million in sales (last year). (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

First year

Last year