5. Business and Financial Risk(9.29%,7.9%, 10.68%, 10.22%)

($1.30, $1.37, $1.23, $0.98, $1.17)

(12.07% and $1.69, 14,48% and $1.94, 13.88% and $1.86, 10.26% and $1.44)

(decrease, increase)

5. 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 $350,000 in assets. - The project is expected to produce earnings before interest and taxes (EBIT) of $50,000. - Common equity outstanding will be 25,000 shares. - The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be addition, Purple Panda's earnings per share (EPS) will be Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Purple Panda Importers's ROE and the company's EPS will be if management decides to finance the project with 50% debt and 50% equity. As a firm uses more debt in its capital structure, lenders will usually the interest rate charged