Reference no: EM133141462

Question - Lazio Company's return on net operating asset is 10 percent and its tax rate is 38 percent. 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 13% coupon and $1 million common stock.

2) Issue $2 million banks with 13% coupon

Required -

a. Determine NOPAT and net income for each alternative.

b. Calculate return on common shareholders' equity for each alternative (use ending equity).

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

d. Calculate return on net operating assets for each alternative. Please interpret your results for this part.