2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $300,000 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 $50,000. Common equity outstanding will be 20,000 shares. The company incurs a tax rate of 25%. 13.13% and $2.10, respectively on equity (ROE) on the project will be 12.50% In If the project is financed using 100% equity capital, th addition, Purple Panda's earnings per share (EPS) will 21.00% and $3.02, respectively Alternatively, Purple Panda Importers's CFO is also con company's debt will be 10%. Because the company wil Panda Importers's ROE and the company's EPS will be 50% debt and 50% equity. 17.50% and $2.63, respectively 50% debt and 50% equity capital. The interest rate on the 19.25% and $2.76, respectively Jith equity, it will have only 10,000 shares outstanding. Purple vif management decides to finance the project with When a firm uses debt financing, the business risk exposure for the firm's common shareholders will