Question
Elite Co Ltd return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net operating assets ($4 million) are financed
Elite Co Ltd return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net operating assets ($4 million) are financed entirely by common shareholders equity. Management is considering its options to finance an expansion costing $2 million. It expects return on net op[1]erating assets to remain unchanged.
There are two alternatives to finance the expansion:
1. Issue $1 million bonds with 12% coupon, and $1 million common stock.
2. Issue $2 million bonds with 12% coupon.
Determine net operating income after tax (NOPAT) and net income for each alternative.
a. 1. NOPAT = 600,000 / NI = 508,000
2. NOPAT = 600,000 / NI = 350,000
b. 1. NOPAT = 600,000 / NI = 528,000
2. NOPAT = 600,000 / NI = 456,000
c. 1. NOPAT = 600,000 / NI = 500,000
2. NOPAT = 600,000 / NI = 528,000
d. 1. NOPAT = 600,000 / NI = 628,000
2. NOPAT = 600,000 / NI = 456,000
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