2. Business and financial risk Aa Aa The impact of financial leverage on return on equity and earnings per share Consider the following case of Free Spirit Industries Inc.: Suppose Free Spirit Industries Inc. is considering a project that will require $250,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $55,000. Common equity outstanding will be 15,000 shares The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Free Spirit Industries Inc.'s return on equity (ROE) on the project will be . In addition, Free Spirit's earnings per share (EPS) will be Alternatively, Free Spirit Industries 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 13%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Free Spirit Industries Inc.'s ROE and the company's EPS will be debt and 50% equity. if management decides to finance the project with 50% Typically, using financial leverage will a project's expected ROE