3. The effect of financial leverage on ROE Companies that we debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but Leverage also increases the risk that shareholders bear Consider the following user Three Waters Co. is a small company and is considering a project that will require $600,000 in assets. The project will be financed with 100% equity The company toes a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBIT (earning before interest and taxes) of $155,000? 14,54% 20.35 19.30 11.63% Determine what the project's ROE will be fits EBIT 5 -560,000. When calculating the tax effects, assume that Three Water Co, whole who large. Dette income this year -7.51 DO Three Waters Co is also considering financing the project with 50% equity and 50% debt. The interest rate on the company's debt will be 11%. What will be the project's ROE if it produces an EBIT of $155,000? O 30:50 32.03% 25.90% O 21.35% What will be the project's Roe if it produces an EBIT of -560,000 and it finances 50% of the project with equity and 50% with debt? When calculating the tax effects, assume that Three Waters Co. as a whole will have a large positive income this year -23.255 0-29.06 20.92% 25.58% The use of financial leverage the expected ROE risk bome by stockholders. The greater the firms chance of bankruptcy the more liksy to use debt in an effort to boost profits. the probability of a large loss, and consequently its optima debt ratio wil be manager