2. Business and financial risk The impact of financial leverage on return on equity and earmings per shane Consider the following case of Lost Pigeon Aviation: Suppose Lost Pigeon Aviation is considering a project that will require $250,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. Common equity outstanding will be 20,000 shares. The company inars a tax rate of 35%. If the project is financed using 100% equity capital, then Lost Pigeon Aviation's retum on equity (ROE) on the project will be . In addition, Lost Pigeon's earnings per share (EPS) will be Alternatively, Lost Pigeon Aviation's CO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the com pany's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. Lost Pigeon Aviation's ROE and the company's EPS will be equity. if management decides to finance the project with 50% debt and so% Typically, using financial leverage will a project's expected ROE