Fit corporation return on net operating assets

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Reference no: EM131103728

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.

Required:

a. Determine net operating income after tax (NOPAT) and net income for each alternative.

b. Compute return on common shareholders" equity for each alternative (use ending equity).

c. Calculate the assets-to-equity ratio for each alternative.

d. Compute return on net operating assets and explain how the level of leverage interacts with it in helping determine which alternative management should pursue.

Reference no: EM131103728

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