3. The effect of financial leverage on ROE Companies that use debt in their capital structure are said to be using financial leverape. Using leverage can increase stareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Westem Gas 4 Electric co. is a small company and is considering a project that will require 5500,000 in assets. The project will be financed with 1000 a equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project if it produces an EBII (earnings before interest and taxes) of $190,000 ? 21.00% 23,1096 14,7046 17.85% Determine what the project'5 ROE will be if its EAIT is 550,000. When calculating the tax effects, assteme that Western Gas \& Electric Co, as a whoke will have a large, positive income this year. Wertern Gas 8. Electric Co. is also considering financing the project with 50% equity and 505 debt. The linterest rate on the company's debt will be 12%. What will be the projects ROE If it produces an EBIt of $140,000? 33.00%26.40%36.30%37.95% What will be the project's ROE if if produces an EBIT of $50,000 and it finances 5098 of the project with equity anid 50% with debt? When calculating the tax effects, assume that Western. Gas \&. Llectric Co. as a whole will have a large, positive income thits year. The use of tinancial leverage the expected ROEp risk borne by stockholders. The greater the firm's chance of bankruptcy, the is more hikely to use debt in an effort to boost profits