Suppose Lost Pigeon Aviation is considering a project that will require $400,000 in assets. The company...

Transcribed Image Text:

Suppose Lost Pigeon Aviation 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 law. The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. Common equity outstanding will be 25,000 shares. The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Lost Pigeon Aviation's return on equity (ROE) on the project will be addition, Lost Pigeon's earnings per share (EPS) will be . In Alternatively, Lost Pigeon Aviation'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 13%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Lost if management decides to finance the project with 50% Pigeon Aviation's ROE and the company's EPS will be debt and 50% equity. When a firm uses debt financing, the business risk exposure for the firm's common shareholders will Suppose Lost Pigeon Aviation 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 law. The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. Common equity outstanding will be 25,000 shares. The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Lost Pigeon Aviation's return on equity (ROE) on the project will be addition, Lost Pigeon's earnings per share (EPS) will be . In Alternatively, Lost Pigeon Aviation'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 13%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Lost if management decides to finance the project with 50% Pigeon Aviation's ROE and the company's EPS will be debt and 50% equity. When a firm uses debt financing, the business risk exposure for the firm's common shareholders will