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2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Green Rabbit Transportation Inc. Suppose Green Rabbit Transportation Inc. is considering a project that will require $200,000 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 $40,000 . Common equity outstanding will be 20,000 shares. The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Green Rabbit Transportation Inc.'s return on equity (ROE) on the project will be In addition, Green Rabbit's earnings per share (EPS) will be Alternatively, Green Rabbit Transportation 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 10%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding Green Rabbit Transportation 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 The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Green Rabbit . In addition, Green Rabbit's earnings per share (EPS) Alternatively, Green Rabbit Transportation Inc.'s CFO is also considerin on the company's debt will be 10%. Because the company will finance Green Rabbit Transportation Inc.'s ROE and the company's EPS will be project with 50% debt and 50% equity. Typically, using financial leverage will 22.50% and $2.25, respectively 28.13% and $2.70, respectively 27.00% and $2.59, respectively 19.13% and $1.91, respectively a project's expected ROE. ity (ROE) on the project will be ebt and 50% equity capital. The inter y, it will have only 10,000 shares out if management decides to fina. Grade It Now Save & Continu Continue without sa