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

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

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

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.

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

As per the given information we can calculate the desired results as follows

Q 23 : The Net Operating Profit after Taxes for Plan A and Plan U are follows

Information	Plan A	Plan U
Total Capital	$ 200	$ 200
Total Equity	$ 200	$ 200
Total Debt	$ 0	$ 0
Expected Sales	120 Units	120 Units
Sales Price	$ 2.50/unit	$ 2.50/unit
Fixed Cost	$ 20	$ 60
Variable Cost per unit	$ 1.60	$ 1.10
Tax Rate	40%	40%

Total Sales = Expected Sales * Sales Price

Total Sales for Plan A: 120 * 2.50 = $ 300

Total Sales for Plan U: 120 * 2.50 = $ 300

Total Variable Cost = Expected Sales * Variable Cost per unit

Total Variable Cost for Plan A: 120 * 1.60 = $ 192

Total Variable Cost for Plan U: 120 * 1.10 = $ 132

Total Fixed Cost for Plan A: $ 20

Total Fixed Cost for Plan U: $ 60

NOPAT = (Total Sales - Total Variable Costs - Total Fixed Costs) * ( 1-Tax Rate )

NOPAT for Plan A: ( 300 - 192 - 20 ) * ( 1 - 40% )

= 88 * ( 1 - 40% )

= $ 52.80

NOPAT for Plan U: ( 300 - 132 - 60 ) * ( 1 - 40% )

= 108 * ( 1 - 40% )

= $ 64.80

So, the NOPAT for Plan A is $ 52.80 and Plan U is $ 64.80. Therefore the correct answer is option (e)

Q 24 : ROIC of Plan A and Plan U is calculated as follows

ROIC refers to the return on invested capital and the formula to calculate ROIC is

= NOPAT / Total Capital invested

NOPAT of Plan A = $ 52.80

NOPAT of Plan U = $ 64.80

Invested Capital in both Projects is $ 200

ROIC for Plan A = 52.80 / 200

= 0.264 or 26.40%

ROIC for Plan U = 64.80 / 200

= 0.324 or 32.40%

So, the ROIC for Plan A is 32.40% and Plan U is 32.40%. Therefore the correct answer is option (a)

As there are multiple questions asked, So I have answered the first 2. Request you to ask the other question seperately.