In the attached file, the problem is explained in it's entirety. However, I do not understand the net income figure of 5,000,000.00 and the NOPAT of 3,000,000.00. The problem in the first step says show current numbers. This has to be the case because the expansion of 6,000,000.00 has not occurred yet. Where do these numbers come from and where does the interest figure of 1,000,000.00 come from if the expansion hasn't happened yet? The last answer from your tutor said that net and NOPAT were both 1,000,000.00 which I agree with. Thanks!

Exercise 8-2, p. 489 Analyzing Returns and Strategies of Alternative Financing Roll Corporation's return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net operating assets ($10 million) are financed entirely by common shareholders' equity. Management is considering using bonds to finance an expansion costing $6 million. It expects return on net operating assets to remain unchanged. There are two alternatives to finance the expansion: 1. Issue $2 million bonds with 5% coupon and $4 million common stock. 2. Issue $6 million bonds with 6% coupon. Required: a. Compute Roll's current net operating income after tax (NOPAT) and net income. Return on net operating assets 10% Tax rate 40% Net operating assets 10,000,000 Expansion cost 6,000,000 Tax Interest Net income $ 4,000,000 1,000,000 5,000,000 = Net Profit - (Interest + Tax + Dividends) Net operating income after tax (NOPAT) $ 3,000,000 = Operating Income x (1 - Tax Rate) b. Determine net income and net operating income after tax for each alternative financing plan. Alternative 1 Net operating income after tax (NOPAT) $ 1,600,000 =1,000,000+6,000,000*10% Net income $ 1,540,000 =1,600,000-(2,000,000*5%*(1-40%)) Alternative 2 Net operating income after tax (NOPAT) $ 1,600,000 =1,000,000+6,000,000*10% Net income $ 1,384,000 =1,600,000-(6,000,000*6%*(1-40%)) c. Compute return on common shareholders' equity for each alternative (use ending equity). Alternative 1 Return on common shareholders' equity 11.00% =1,540,000/(10,000,000+4,000,000) Alternative 2 Return on common shareholders' equity 13.84% =1,384,000/(10,000,000+0) d. Explain any difference in the ROCE for the alternative plans computed in (c). Include a discussion of leverage your response. The difference in the return on common shareholders' equity for the alternatives is notable due to the successful equity trade. Under the second alternative, return on common shareholders' equity is higher, so the company shoul pursue alternative two. 0%. Its net operating assets considering using bonds to emain unchanged. There are st + Tax + Dividends) x (1 - Tax Rate) ncing plan. 00*5%*(1-40%)) 00*6%*(1-40%)) equity). 000+4,000,000) ude a discussion of leverage in table due to the successful higher, so the company should Exercise 8-6, p. 490 Analyzing Financial Leverage for Shareholders' Returns Rose Corporation's condensed balance sheet for Year 2 is reproduced below: Assets Current assets Noncurrent assets Total assets Liabilities and Equity Current liabilities Noncurrent liabilities (8% bonds) Common stockholders' equity Total liabilities and equity $ 250,000 1,750,000 $ 2,000,000 $ 200,000 675,000 1,125,000 $ 2,000,000 Additional Information: 1. Net income for Year 2 is $157,500. 2. Income tax rate is 50%. 3. Amounts for total assets and shareholders' equity are the same for Years 1 and 2. 4. All assets and current liabilities are considered to be operating. Required: a. Determine whether leverage (from long-term debt) benefits Rose's shareholders. (Hint: Examine ROCE with and without leverage.) ROCE with leverage At present level: 14.00% So noncurrent liabilities can be substituted with equity and as such there would be no interest expended. Net income (w/leverage) $ 157,500 Plus: Saved interest 54,000 Less: Tax effect 27,000 27,000 Resulting net income (w/o leverage) $ 184,500 ROCE without leverage At present level: 10.25% Thus, leverage does benefit the shareholders since it is much higher with leverage, but lower without it. b. Compute Rose's NOPAT and RNOA (use ending NOA). Net operating income after tax (NOPAT) $ 184,500 Return on Net operating assets (RNOA) 10.25% c. Demonstrate the favorable effect of leverage given the disaggregation of ROCE and your answer to part b. The favorable effect of leverage comes from using the borrowed fund for capital structure. Once again, since the ROCE is higher than RNOA, financial leverage benefits the shareholders. amine ROCE with ity and as such there t is much higher with nswer to part b. ce again, since the