Attempts Keep the Highest / 3 2. Business and financial risk The impact of financial leverage...

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Attempts Keep the Highest / 3 2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Free Spirit Industries Inc.: Suppose Free Spirit Industries Inc. is considering a project that will require $250,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 15,000 shares. The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROE) on the project will be addition, Free Spirit's earnings per share (EPS) will be . In Alternatively, Free Spirit Industries Inc.'s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Free Spirit Industries Inc.'s ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. Typically, using financial leverage will a project's expected ROE. Attempts Keep the Highest / 3 2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Free Spirit Industries Inc.: Suppose Free Spirit Industries Inc. is considering a project that will require $250,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 15,000 shares. The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROE) on the project will be addition, Free Spirit's earnings per share (EPS) will be . In Alternatively, Free Spirit Industries Inc.'s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Free Spirit Industries Inc.'s ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. Typically, using financial leverage will a project's expected ROE.