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21.

Problem 5-23 Leverage and sensitivity analysis [LO6]
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
Plan D
Plan E
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.)

Current Plan
Plan D
Plan E
Earnings per share
$
$
$

(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.)

Current Plan
Plan D
Plan E
Earnings per share
$
$
$

(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.

Plan E
Current…