E 8-1

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

a. First alternative:
NOPAT = $6,000,000 * 10% = $600,000
Net income = $600,000 – [$1,000,000*12%](1-.40) = $528,000

Second alternative:
NOPAT = $6,000,000 * 10% = $600,000
Net income = $600,000 – [$2,000,000*12%](1-.40) = $456,000

b. First alternative:
ROCE = $528,000 / $5,000,000 = 10.56%
Second alternative:
ROCE = $456,000 / $4,000,000 = 11.40%

c. First alternative:
Assets-to-Equity = $6,000,000 / $5,000,000 = 1.2
Second alternative:
Assets-to-Equity = $6,000,000 / $4,000,000 = 1.5

d. First, let’s compute return on assets (RNOA):

First alternative: $600,000 / $6,000,000 = 10%
 Second alternative: $600,000 / $6,000,000 = 10%

Kedua, perhatikan bahwa tingkat bunga adalah 12% pada utang (obligasi). Lebih penting lagi, tingkat
bunga setelah pajak adalah 7,2% (12% x (1-0,40), yang lebih kecil dari RNOA. Oleh karena itu,
perusahaan menghasilkan lebih banyak dari asetnya daripada membayar hutang setelah pajak.
Artinya, ia dapat berhasil berdagang di ekuitas — menggunakan dana pemegang obligasi untuk
mendapatkan keuntungan tambahan. Akhirnya, karena alternatif kedua menggunakan lebih banyak
utang, sebagaimana tercermin dalam rasio aset terhadap ekuitas di c, alternatif kedua mungkin lebih
disukai. Pemegang saham akan mengambil risiko tambahan dengan alternatif kedua, tetapi
pengembalian yang diharapkan lebih besar sebagaimana dibuktikan dari perhitungan di b.