Ch 14: Assignment - Capital Structure and Leverage 2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Free Spint Industries Inc.: Suppose Free Spirit Industries Inc is considering a project that will require: $400,000 in assets The company is small, so it is exempt from the interest deduction limitation under the new tax fow. The project is expected to produce earrings before interest and taxes (EBIT) of 545,000. Common equity outstanding will be 30,000 shares The company incurs a tax rate of 25% If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROC) on the project will be addition, Free Spirit's camnings per share (EPS) will be Alternatively, Free Spirit Industries Inc.'s Crow also considering financing the project with 50% dete and 50% moty capital. The interest rate on the company's debt will be 13%. Because the company will finance only 50% of the project with equity, it will have only 15,000 shares outstanding, Free Spirit Industries Inc's ROE and the company's eps will be of management decides to finance the project with 50% debt and 50% equity Typically, using financial leverage will a project expected ROL