FIT corporation’s return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net oper

Aug 4th, 2016
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FIT corporation’s 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 operating 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 Questions: 1. Determine net operating income after tax (NOPAT) and net income for each alternative 2. Computer return on common shareholders’ equity for each alternative (use ending equity) 3. Calculate the assets-to-equity ratio for each alternative 4. Compute return on net operating assets and explain how the level of leverage interacts with it in helping determine which alternative management should pursue

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20Exercise details: FIT corporations return on net operating assets (RNOA) is 10% and its tax rate is 40%. Itsnet operating assets ($4 million) are financed entirely by common shareholders equity. Management isconsidering its options to finance an expansion costing $2 million. It expects return on net operating assets toremain unchanged. There are two alternatives to finance the expansion:1.Issue $1 million bonds with 12% coupon, and $1 million common stock2.Issue $2 million bonds with 12% couponQuestions:1.Determine net operating income after tax (NOPAT) and net income

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