2. Business and financial risk As 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 $200,000 in assets . The project is expected to produce eamings before interest and taxes (EBIT) of $55,000. . Common equity outstanding will be 15,000 shares. * The company incurs a tax rate of 30%. If the project is financed using 100% equity capital, then Free Spirit Industnes Inc.'s return on equity (ROE) on the project will be 19.25% . In addition, Free Spint'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 10%. Because the company will finance only 50% of the project with equity, it will have only 7,500 shares outstanding. Free Spint Industries Inc. s ROE and the company's EPS will be if management decides to finance the project with 50%