Question

Plan A, U, L

Input Data	Plan A (Lower Fixed Cost) (Higher Variable Cost) (No Debt)	Plan U (Higher Fixed Cost) (Lower Variable Cost) (No Debt)	Plan L (Higher Fixed Cost) (Lower Variable Cost) (Debt)
Required Capital	$200	$200	$200
Book Equity	$200	$200	$150
Debt			$50
Interest Rate	8%	8%	8%
Sales Price (P)	$2.50	$2.50	$2.50
Tax Rate (T)	40%	40%	40%
Expected Unit Sold (Q)	120	120	120
Fixed Costs (F)	$20	$60	$60
Variable Costs (V)	$1.60	$1.10	$1.10

Question 23 (1 point)

Based on the information above, what are the NOPATs of Plan A and Plan U?

Question 23 options:

	NOPAT of Plan A = $49.00, NOPAT of Plan U = $48.52
	NOPAT of Plan A = $41.20, NOPAT of Plan U = $20.21
	NOPAT of Plan A = $21.41, NOPAT of Plan U = $12.85
	NOPAT of Plan A = $41.10, NOPAT of Plan U = $12.11
	NOPAT of Plan A = $52.80, NOPAT of Plan U = $64.80

Question 24 (1 point)

Based on the information from the table, what are the ROIC of Plan A, and Plan U?

Question 24 options:

	ROIC of Plan A = 26.40%, ROIC of Plan B = 32.40%
	ROIC of Plan A = 26.40%, ROIC of Plan B = 26.40%
	ROIC of Plan A = 10.70%, ROIC of Plan B = 6.050%
	ROIC of Plan A = 10.70%, ROCI of Plan B = 12.48%
	None of the above

Question 25 (1 point)

Based on the information from the table, what do you expect the ROE of plan L versus plan U?

Question 25 options:

	Plan U should have lower ROE because of the higher NI.
	Plan U should have lower ROE because of NI was sharing over a smaller base of equity.
	Plan L should have higher ROE because of NI was sharing over a smaller base of equity.
	Plan L should have lower ROE because of higher NI.
	None of the above.

Question 26 (1 point)

Based on the information from the table, what can you conclude regarding the difference in total cashflow distribution between Plan U and Plan L?

Question 26 options:

	Plan L should distribute more total cash flow to bondholders and stockholders due to tax saving in interest expense.
	Plan L should distribute more total cash flow to bondholders and stockholders due to the higher revenue.
	Plan U should distribute more total cash flow to bondholders and stockholders due to tax saving in interest expense.
	Plan U should distribute more total cash flow to bondholders and stockholders due to higher revenue.
	None of the above.

Answer 1

Input Data	Plan A	Plan U	Plan L
(Lower Fixed Cost)	(Higher Fixed Cost)	(Higher Fixed Cost)
(Higher Variable Cost)	(Lower Variable Cost)	(Lower Variable Cost)
(No Debt)	(No Debt)	(Debt)
Required Capital	$200	$200	$200
Book Equity	$200	$200	$150
Debt			$50
Interest Rate	8%	8%	8%
Sales Price (P)	$2.50	$2.50	$2.50
Tax Rate (T)	40%	40%	40%
Expected Unit Sold (Q)	120	120	120
Fixed Costs (F)	$20	$60	$60
Variable Costs (V)	$1.60	$1.10	$1.10
Total sales	$300.00	$300.00	$300.00<--P*Q
NOPAT	$52.80	$64.80	$64.80<--(Sales-F-V*Q)*(1-T)
Net Income	$52.80	$64.80	$62.40<--(Sales-F-V*Q-Intrest)*(1-T)
ROIC(%)	26.40%	32.40%	32.40%<--NOPAT/Required capital
ROE (%)	26.40%	32.40%	41.60%<--Net Income/Total Equity

The above table gives the case facts along with the answers.

NOPAT=

As per the table the answers are:

Q24)NOPAT of Plan A = $52.80, NOPAT of Plan U = $64.80

Q25)ROIC of Plan A = 26.40%, ROIC of Plan B = 32.40%

Q26)Plan L should have higher ROE because of NI was sharing over a smaller base of equity.

Q27)Plan L should distribute more total cash flow to bondholders and stockholders due to tax saving in interest expense.

Please reach out for any further clarifications