5. Business and financial risk Aa Aa The impact of financial leverage on return on equity and earnings per share Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $400,000 in assets The project is expected to produce earnings before interest and taxes (EBIT) of $45,000. Common equity outstanding will be 10,000 shares. The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Happy Turtle Transportation Company's return on equity (ROE) on the project will be 7.31% . In addition, Happy Turtle's earnings per share (EPS) will be $2.93 Alternatively, Happy Turtle Transportation Company'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 13%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares outstanding. Happy Turtle Transportation Company's ROE and the company's EPS will be with 50% debt and 50% equity. if management decides to finance the project As a firm uses more debt in its capital structure, lenders will usually the interest rate charged