4. Business and financial risk Aa Aa The impact of financial leverage on return on equity and earnings per share Consider this case: Free Spirit Industries Inc. is considering a project that will require $350,000 in assets. The project is expected to produce an EBIT (earnings before interest and taxes) of $50,000 The project will be financed with 100% equity. There will be 10,000 shares of common equity outstanding, The company faces a tax rate of 30%. Using the preceding information, what will be Free Spirit Industries Inc.'s return on equity (ROE) for this project? 10.00% 12.00% 11.50% 11.00% Free Spirit Industries Inc.'s earnings ter share (EPS) be Fit finances this project with 100% equity Free Spirit Industries Inc.'s Fois so considering financing this project with 50% debt and 50% equity. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. What will be the ROE on this project if the company decides to finance the protect with 50% debt and equity 11.609 O 11.02 14.50% 09.86% Using the preceding information, what will be Free Spirit Industries Inc.'s return on equity (ROE) for this project? 10.00% 12.00% 11.50% 11.00% Free Spirit Industries Inc.'s earnings per share (EPS) will be If it finances this project with 100% equity. Free Spirit Industries Inc.'s CFO is also considering financing this project with 50% debt and 50% equity. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. What will be the ROE on this project if the company decides to finance the project with 50% debt and 50% equity? 0 11.60% 11.02% 14.50% 9.86% Free Spirit Industries Inc.'s EPS will be if it finances this project with 50% equity and 50% debt. When a firm uses debt, this the business risk placed on common shareholders. increases decreases