5. Business and financial risk AaAa The impact of financial leverage on return on equity and earnings per share Consider the following case of Free Spirit Industries Inc.: Suppose Free Spirit Industries Inc. is considering a projedt that will require $200,000 in assets. The project is expected to produce eamings before interest and taxes (EBIT) of $40,000 Common equity outstanding will be 20,000 shares. Th company incurs a tax rate of 40%. If the project is financed using 100% equity capital, ten Free Spirit Industries Inc.'s return on equity (ROE) an the project will be . In addition, Free Spirit's eamings per share (EPS) will be Altematively, Free Spirit Industries Inc.'s CFO is also considering financing the project with 50% debt and 50% equity capital. Te interest rate on the company's debt will be 10%. Because the company will finance only 50% of the projecdt with equity, it will have only 10,000 shares outstanding. Free Spirit Industries Inc.'s ROE and the company's EPS will be debt and 50% equity. if management decides to finance the project with 50% When a firm uses debt financing, the business risk exposure for the firm's common shareholders will