Reference no: EM132580222

Niglow Corporation produces metal castings. In the past year it earned a 10% return on its net operating assets base of RM10 million. Niglow needs RM10 million to expand its operations, and has the option of obtaining none, some, or all of the proceeds from the bank. Currently the company is all equity financed. It expects to be able to maintain its return on net operating assets after the expansion. The bank has indicated that the amount it will charge on the loan will be dependent upon the resultant debt/equity ratio. Specifically, the rates will be 8%, 9%, 10%, and 12% for debt-to-equity ratios less than or equal to 0.25, 0.5, 1.0, and over 1.0, respectively. Niglow's tax rate is 40%.

Required:

Calculate and compare Niglow's return on common equity (ROCE) if the expansion is financed by:

i. using all equity

ii. 50% debt, 50% equity

iii. all debt