2. Business and financial rink The insact of financial leverage on return on equity and earnings per share Consider the fellowing case of Lost Pigeon Aviationt Suppose Lost Pigeon Aviation is considering a project that will recuire $200,000 in assets. - The company is small, so it is exempt from the incerest deducton limitakion under the niew tax ian. - The projectis expected to produce earnings before interest and taxes (tirT) of $50,000. - Common equisy outstanding will be 15,000 shares. - The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Lost Pigeon Aviatien's return on equity (ROE) on the project will be 1n addwon, Lost Pigeon's earnings per share (EPS) will be Alternatively, Lost Pigean Aviation's CFO is also considering financing the project with 50% detot and 50% equty capital The interest rate on the company's debt wil be 11%. Because the compary will finance only 50% of the project with equity, it will have only 7,500 shares autstanding. Lost Pgeon Rviation's RCE and the company's EP5 will be If management dedides to finance the preject with 50% debt and 50% equity. When a firm uses debt finaneng, the business risk exposure for the firm's common shareholders will