Aa Aa E 3. The effect of financial leverage on ROE Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Water and Power Co. is considering a project that will require $700,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 40%. What will be the ROE (return on equity) for this project if it produces an EBIT (earnings before interest and taxes of $150,000? O 12.9% O 11.0% O 14.2% O 7.7% Determine what the project's ROE will be if its EBIT is -$45,000. When calculating the tax effects, assume that Water and Power Co. as a whole will have a large, positive income this year. O -3.9% O -3.3% O -4.5%