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