Sombra Corp. is also considering financing the project with $50\%$ equity and $50\%$ debt. The interest rate on the company's debt will be $11\%.$ What will be the project's ROE if it produces an EBIT of $$155,000?$

$18\mathrm{.}72\%$

$24\mathrm{.}96\%$

$19\mathrm{.}97\%$

$26\mathrm{.}21\%$

What will be the project's ROE if it produces an EBIT of $-$$$60,000$ and it finances $50\%$ of the project with equity and $50\%$ with debt? When calculating the tax effects, assume that Sombra Corp. as a whole will have a large, positive income this year.

$-22\mathrm{.}17\%$

$-21\mathrm{.}11\%$

$-26\mathrm{.}39\%$

$-20\mathrm{.}05\%$

The use of financial leverage the expected ROE, the probability of a large loss, and consequently the risk borne by stockholders. The greater the firm's chance of bankruptcy, the its optimal debt ratio will be$.$ manager is more likely to use debt in an effort to boost profits.